Sarkozy Lagarde
Former France's President Nicolas Sarkozy with International Monetary Fund (IMF) Managing Director Christine Lagarde (Reuters)

French police have searched the Paris home of IMF chief Christine Lagarde in relation to an investigation into a €400m (£340m) arbitration deal in favour of French tycoon Bernard Tapie.

Lagarde's lawyer, Yves Repiquet, said his client had nothing to hide. The search would help to prove her innocence, he said.

Lagarde, 57, was finance minister in the conservative government led by Sarkozy's former political adviser François Fillon in 2008 when Tapie won a settlement with part state-owned bank Credit Lyonnais.

The case revolved around the alleged mishandled sale of Adidas by Credit Lyonnais to businessman Robert Louis-Dreyfus on behalf of Tapie, who was a majority stakeholder of the sportswear brand in 1993.

Tapie claimed he was defrauded by the bank's conduct and started a long legal battle that ended up being referred by Lagarde to an arbitration panel in 2007.

Lagarde also approved the panel's decision to award damages.

Critics say that because public money was involved, the case should not have been settled by private arbitration.

Investigators believed that the settlement was helped by Tapie's support of Sarkozy in the 2007 election.

Lagarde was appointed managing director of the Washington-based International Monetary Fund in 2011 after her predecessor and fellow countryman Dominique Strauss-Kahn was forced to step down.

Strauss-Kahn, who at the time was widely tipped to take the reins of France's socialist party and challenge Sarkozy at the 2012 presidential ballots, was arrested in New York on allegations of attempted rape.

Charges against Strauss-Kahn were later dropped.

Lagarde's term as IMF chief ends in 2016.

IMF New York International Monetary Fund