PARIS (Reuters) - France's top prosecutor general has recommended that magistrates drop their investigation into International Monetary Fund (IMF) boss Christine Lagarde for alleged negligence when she was finance minister, her lawyer said on Wednesday.

Lagarde was put under formal investigation by French magistrates in August last year over her role in a compensation pay-out of some 400 million euros (S$633 million) to businessman Bernard Tapie following his dispute with the now defunct state-owned bank Credit Lyonnais.

Investigators are looking into allegations that Tapie, a supporter of former president Nicolas Sarkozy, was improperly awarded the sum in an arbitration to settle the spat. Lagarde was finance minister at the time.

She said last August that the sole allegation was that"through inadvertence or inattention I may have failed to intervene to block the arbitration". She denied wrongdoing and asked her lawyer to appeal.

"I have just been notified of the prosecution's summing up which dismisses the case," Yves Repiquet told Reuters.

If magistrates at the Cour de justice de la Republique - which judges ministers for crimes in office - follow Prosecutor General Jean-Claude Marin's recommendation, they will drop the investigation against Lagarde.

Tapie sued the state for compensation after selling his stake in sports company Adidas to Credit Lyonnais in 1993. He claimed the bank had defrauded him after it later resold his stake for a much higher sum.

Credit Lyonnais, now part of Credit Agricole, has denied wrongdoing.