The Spanish royal family was battered by further scandal on Tuesday when the youngest daughter of King Juan Carlos was named as a formal suspect in a long-running corruption inquiry.

Princess Cristina, 48, has been summoned to answer allegations of money laundering and tax evasion. The princess would be the first member of the king's family to appear in court since the restoration of the monarchy in 1975.

The charges relate to alleged embezzlement by her husband, Iñaki Urdangarin. The former Olympic handball player and his business partner, Diego Torres, are accused of siphoning off €5.8m (£4.8m) of public funds.

The money was allegedly funnelled through their not-for-profit Instituto Nóos and their family business Aizoon, of which Cristina is co-owner.

The princess will now have to testify in Palma de Mallorca on 8 March.

How much Cristina knew of her husband's allegedly shady activities is hotly contested. Cristina and Urdangarin deny any wrongdoing. Last year the investigating judge, José Castro, targeted the princess for the first time – only for Mallorca's provincial court to throw out his ruling.

After gathering further evidence Castro named Cristina on Tuesday as an official suspect for a second time. A more senior judge may again decide that the princess should be spared from giving evidence.

The scandal exposes the murky interstices between royals and entrepreneurship, a perennial source of trouble for modern-day noble houses.

Urdangarin and Torres are accused of exploiting their connections to take money from the regional governments of Valencia and the Balearic Islands, both of whose presidents have faced a string of corruption charges.

In theory, the king's son-in-law organised sports and tourism conferences and provided consultancy advice. In practice, it is alleged, much of the work between 2004-06 was nonexistent, with the cash disappearing into privately owned companies and offshore tax havens.

This subterranean revenue stream helped fund lavish home improvements, investigators claim. Several of the allegations concern Cristina and Urdangarin's €6m mansion in a fashionable district of Barcelona, which was done up with a further €3m.

There have been questions too over how the couple were able to obtain a massive €5m mortgage. The house has since been confiscated to cover Torres and Urdangarin's €6.1m bail. The net began to close on Cristina when documents showed she had signed herself as both owner and tenant of her marital mansion.

Castro has defended his rigorous inquiry into the affair, describing it as the impartial application of justice. The judge said putting the princess on the stand would remove "any shadow of suspicion" that she is receiving special treatment, El Pais reported.

Ana María Tejeiro, Torres's wife, has been indicted since the start of the investigation while Cristina was treated as being above suspicion. "Are not all Spaniards equal before the law?" Tejeiro's lawyer asked the judge rhetorically.

Tuesday's news is the latest blow to the already tarnished image of the Spanish royal family. King Juan Carlos was crowned in 1975, two days after the death of the dictator Franco. He became the darling of the fledgling Spanish democracy when he played a key role in stopping an attempted military coup in 1981.

From then on the royals were untouchable and when Cristina married Urdangarin in Barcelona in 1997, only weeks after Princess Diana's death, many in Spain hoped she would fill Diana's shoes as a pretty, modern, self-assured princess. The King gave the pair the title Dukes of Palma.

However, the royals began to lose their shine, starting with rumours of the king's extramarital affairs and then the divorce of Cristina's older sister, Elena, in 2009.

Then, two years ago, Juan Carlos was photographed standing proudly next to the elephant he shot on a hunting trip in Botswana. This proved too much for many Spaniards. Not only was the king honorary president of the WWF but embarking on such an expensive trip when more than five million were out of work in Spain seemed proof that the royals were out of touch.

In November Juan Carlos had hip surgery, and during a public appearance on Monday he seemed unsteady. Increasingly frail, a recent opinion poll by El Mundo said 62% of Spaniards would like him to abdicate in favour of his son, the popular Crown Prince Felipe.

The royal household responded on Tuesday to the judge's summons by saying it had "maximum respect for judicial decisions", but the head of the king's household, Rafael Spottorno, said in a recent television interview that the three-year investigation had become a "martyrdom" for the already scandal-beset royal family.

In his 227-page decree, Castro said that it would have been "difficult for Urdangarin to defraud Inland Revenue without his wife's knowledge and acquiescence", adding that Cristina "chose to look the other way".

In the unlikely event that she is found guilty, Cristina faces up to six years in prison for money laundering and a fine of three times the value of the money laundered, as well as further punishment for tax evasion. Cristina and Urdangarin both deny any wrongdoing.