PARIS (AP) - International Monetary Fund (IMF) chief Christine Lagarde is facing questions at a special Paris court on Thursday over her role in the 400 million euro (S$645 million) pay-off to a controversial businessman when she was France's finance minister.

The court hearing threatens to sully the reputations of both Ms Lagarde and France. The payment was made to well-connected entrepreneur Bernard Tapie as part of a private arbitration process to settle a dispute with state-owned bank Credit Lyonnais over the botched sale of Adidas in the 1990s.

It is seen by many in France as an example of the cozy relationship between big money and big power in France.

Ms Lagarde has earned praise for her negotiating skills as managing director of the IMF through Europe's debt crisis and is seen as a trailblazer for women leaders. Her decision to let the Adidas dispute go to private arbitration rather than be settled in the courts has drawn criticism, and French lawmakers asked magistrates to investigate.

Ms Lagarde, smiling at reporters, left her Paris apartment on Thursday morning and appeared at a special court that handles cases involving government ministers. She has denied wrongdoing.

At the time of the payment, entrepreneur Tapie was close to then-French President Nicolas Sarkozy, who was Ms Lagarde's boss. Critics have said the deal was too generous to Mr Tapie at the expense of the French state, and that the case shouldn't have gone to a private arbitration authority because it involved a state-owned bank.

Investigators opened an inquiry in 2011 into possible charges of "complicity to embezzlement of public funds" and "complicity to forgery". The probe may not result in a trial. If it does, and if Ms Lagarde were to be convicted, she could face up to 10 years in prison, according to prosecutors.

The dispute over the Adidas deal had been dragging through French courts for years, and one question for Ms Lagarde is why the government didn't let the courts continue to battle it out.

"What she is being criticised for today is taking the disputes between the bank, Mr. Tapie and the French state out of the national court system and submitting them to three private arbitrators, who decided basically behind closed doors how to resolve the dispute," said Mr Christopher Mesnooh, a lawyer from Field Fisher Waterhouse in Paris who is not connected to the case.

Ms Lagarde and the Washington-based IMF were aware of the probe when she took over as managing director of the fund from Mr Dominique Strauss-Kahn in 2011. The IMF has expressed its confidence in Ms Lagarde throughout the investigation.

In March, French investigators searched Ms Lagarde's Paris home. Her lawyer said at the time that she welcomed the search as a step towards proving her innocence.

French Finance Minister Pierre Moscovici told Le Monde newspaper this week that the government may seek to annul the arbitration deal if enough evidence emerges of wrongdoing.

Mr Tapie - a flashy tycoon and former football club owner who has also tried his hand as an actor, singer and government minister - insists that he deserved the settlement. He says the investigation into the deal is "bogus," a politically motivated hunt by the governing Socialists against Mr Sarkozy's conservatives. Mr Tapie himself may be targeted in a separate probe.

"Lagarde's fate doesn't concern me," Mr Tapie said on Europe-1 radio Thursday.

"When evidence is discovered, then we'll talk."