IMF chief and former finance minister says decision to investigate her for alleged negligence is unfounded

The head of the International Monetary Fund, Christine Lagarde, has been charged with "simple negligence" over her handling of a controversial €400m payout to French business tycoon Bernard Tapie when she was finance minister.

Lagarde announced that she had been placed under investigation by a magistrate on Tuesday – the French equivalent of being charged in the UK – after being questioned for 15 hours at the court of justice in Paris, which deals with cases of alleged ministerial wrongdoing.

But she told a reporter that she would not resign from her position: "I'm going back to work in Washington this afternoon," she said. The IMF chief insisted that she had not broken the law and would appeal.

The case is an embarrassment for Lagarde, the IMF and France. Judicial sources told the Guardian that negligence by a government official carried a possible one-year prison term and/or a €15,000 (£11,900) fine.

Speaking to journalists in her lawyer's office, Lagarde later said: "After three years of investigations, dozens of hours of questioning, the commission realised that I was not complicit in any violation and has therefore been reduced to allege that I may not have been sufficiently vigilant in the arbitration."

Lagarde had earlier been questioned only as an "assisted witness", and not as a suspect, in connection with the arbitration deal worked out in 2008 under which Tapie received the money at taxpayers' expense to settle a commercial dispute with the state. Lagarde was the finance minister of then French president Nicolas Sarkozy at the time.

The case, which has implicated several other former Sarkozy aides, hinges on whether the arbitration process was rigged in favour of Tapie as a reward for his support for the centre-right political leader in the 2007 presidential election. It stems from the sale of the sports giant Adidas in 1993, in which Tapie claimed to have been defrauded by the now-defunct Crédit Lyonnais bank. Soon after Sarkozy became president, Lagarde decided to send the long-running legal dispute with the bank to private arbitration. But the out-of-court settlement was challenged by the Socialist opposition because it was far higher than any previous court ruling.

The investigation into Lagarde was opened in August 2011, on suspicion of possible complicity in the embezzlement of state funds. However the charges of negligence are far less serious. Her former chief of staff, Stéphane Richard, who is director of the phone company Orange, was placed under investigation in June last year with three others, including Tapie, for conspiracy to defraud.

Lagarde said she had asked her lawyer to challenge the magistrate's decision, which she called "totally baseless". The IMF has stood behind its chief who took over after another prominent French politician, Dominique Strauss-Kahn, was forced to resign from the post amid accusations he sexually assaulted a maid in a New York Hotel in 2011. The charges were eventually dropped and he subsequently reached a settlement with the maid.

Largarde's lawyer could not immediately be reached.

Desmond Lachman, a former IMF official, told AFP that he did not believe the situation would have an impact on Lagarde's ability to run the IMF.

"Ms Lagarde has been rather effective in leading the IMF. It hasn't really affected the way in which she has been running the organisation in the past three years and I don't see why this development would change that," he said. He added, however, that if she were forced to step down, the emerging market members would push for a leader from an emerging market economy, marking a first for the IMF.

Paulo Nogueira Batista, the representative of Brazil and 10 other countries on the IMF board, described the developments in France as a "serious matter".

"It's too early to make an assessment, but we need some time to reflect as to whether or not this could be seen as damaging the image of the fund," he told Agence France-Presse, making clear that he was speaking only personally.

"We also need to assess if this case demands so much time that it interferes with her mission."