A billionaires’ brawl in the Bahamas has become a high-dollar court battle.

New York hedge-fund tycoon Louis Bacon has slapped Canadian fashion magnate Peter Nygard with a $50 million defamation suit, charging that Nygard has orchestrated a smear campaign that has falsely accused Bacon of being a racist, drug-trafficker and murderer.

According to Bacon, Nygard has been the next-door neighbor from hell on the exclusive beach strip they share in the Clifton Bay area of the Bahamas, spreading vicious gossip about him online and in local newspapers.

The decade-long battle started as a property-line dispute between Bacon and Nygard, who has an adjoining estate in the luxurious Lyford Cay community.

In one instance, Bacon accuses Nygard of doctoring an October 2011 CBS News report about the arrest of Wall Street titan Rajat Gupta for insider trading. The doctored video superimposed Bacon’s name and face over Gupta’s, falsely alleging that Bacon was at the center of a “billion-dollar scam,” according to the suit.

Elsewhere, the suit cites a flurry of speculation in local Bahamian media after Bacon’s house manager, Dan Tuckfield, died in the billionaire’s pool in May 2010. While official reports cited a heart attack, Nygard used local media to spread rumors about a murder and cover-up by Bacon, the suit claims.

“Louis Bacon filed this lawsuit to hold Peter Nygard and his companies responsible for their unlawful and reprehensible smear campaign,” Bacon’s attorney, Orin Snyder, said in a statement. “We look forward to our day in court.”

Nygard’s representatives denied Bacon’s allegations, calling them a move to distract attention from Bacon’s own agenda.

That includes, according to Nygard, a high-level conspiracy by Bacon to “unseat the ruling political party in the Bahamas” — all for the purpose of installing cronies in local government to block the reconstruction of Nygard’s estate after it was destroyed in a “suspicious fire” in 2009.

“Mr. Bacon has falsely and maliciously accused Mr. Nygard and [Bahamas] Prime Minister Perry Christie of government corruption,” according to Nygard reps. “In fact, Mr. Bacon has falsified evidence of corruption.”

Bacon’s suit, which was unsealed in New York state court late Thursday, charges that Nygard’s smear campaign has “continued to this day.” Last July, the suit charges, Nygard organized a march in Nassau, with demonstrators carrying placards that read “Louis KKK Bacon” and “Moore Capital Management,” the hedge fund Bacon owns.

In a statement, Nygard said some of Bacon’s ancestors were members of the Ku Klux Klan and that in a speech last year, Bacon made “a galling reference to the racist novel ‘Gone with the Wind” as his ‘holy book’ and guide.”