French authorities have formally opened a negligence investigation into Christine Lagarde, the head of the International Monetary Fund (IMF).
She has been questioned about her role in awarding 400m euro (£318m; $527m) in compensation to businessman Bernard Tapie in 2008. She denies wrongdoing.
Ms Lagarde, 58, was finance minister in President Nicolas Sarkozy's government at the time of the award.
Mr Tapie supported Mr Sarkozy in the 2007 presidential election.
He was once a majority shareholder in sports goods company Adidas but sold it in 1993 in order to become a cabinet minister in Francois Mitterrand's Socialist government.
Mr Tapie sued Credit Lyonnais over its handling of the sale, alleging the partly state-owned bank had defrauded him by deliberately undervaluing the company.
His case was later referred by Ms Lagarde to a three-member arbitration panel which awarded the compensation.
Investigators suspect he was granted a deal in return for his support of Nicolas Sarkozy.
Ms Lagarde said last year that her decision to refer Mr Tapie's long-running dispute with Credit Lyonnais to a panel of judges was "the best solution at the time".
Although being placed under formal investigation does not necessarily lead to charges, the development could raise questions about the rest of her term at the IMF, which is due to end in 2016.
She told AFP news agency she had no intention of resigning from the IMF.
Her lawyer, Yves Repiquet, told Reuters news agency he would personally appeal against the French magistrates' decision, which means Ms Lagarde would not need to return to Paris.
Ms Lagarde says she is returning to Washington, where she will brief the IMF board on the recent development.
She replaced Dominique Strauss-Kahn as IMF managing director in 2011.
Mr Strauss-Kahn - also a former French minister - resigned following his arrest in New York on charges of sexual assault that were later dropped.
Ms Lagarde belongs to the same opposition UMP party as Nicolas Sarkozy, who has also been placed under formal investigation on suspicion of seeking to influence judges who were looking into his affairs.
Mr Sarkozy was detained for questioning in July - the first time a former French head of state has been held in police custody.
He is hoping to challenge again for the presidency in 2017 and the allegations are seen as a blow to his hopes of returning to office.