The luxury French fashion label Hermès prides itself on assisting wealthy people who have run out of gift ideas: Nicolas Sarkozy once gave Barack Obama a €6,000 (£5000) black Hermès golfing bag, the Duke of Windsor ordered a custom-made patent leather wheelbarrow for Wallis Simpson and the Queen was once known to be very fond of the label's gloves. But when it comes to offering itself on a plate to eager tycoons building fashion empires, Hermès is rather more circumspect.

The family firm, which began as a harness-maker in the 19th century and is the last major independent luxury fashion house to resist the onslaught of multinationals and conglomerates, has escalated a dispute known as the "handbag wars" that has shaken the Paris luxury goods world.

The standoff between Hermès and its rival LVMH, the owner of Louis Vuitton and Dior, was played out at a hearing before France's stock market regulator on Friday amid allegations of secret takeover plots and sneaky bids for world domination.

The dispute began in 2010 when it emerged that LVMH, owned by Bernard Arnault, France's richest man, had secretly acquired a 17% stake in Hermès that has now risen to 22%. Hermès, run by the sixth generation of its founding family, is fiercely protective of keeping family control. It said it was stupefied to discover Arnault had built up the stake using a system that masked his true identity. It feared it was under attack by a businessman who had secretly spent 10 years trying to take it over. The company said there was "an intruder in the garden but we don't want him in the house".

The stock market watchdog can impose sanctions on Arnault if it finds his stake-building did not comply with market rules. Hermès also filed a legal complaint against LVMH for alleged insider trading and manipulation of share price. LVMH swiftly filed a counter complaint for slander, blackmail and unfair competition. The French media has likened the case to a thriller against a back-drop of a luxury goods market where a crocodile purse can cost more than a car.

LVMH's lawyers told the hearing the case was "dysfunctional", "unfair" and should be thrown out, saying it had done nothing wrong, and complaining of a "smear campaign and slander".

Hermès has defied the financial crisis with growing sales and continues to defend its painstakingly slow, handmade fashion. Its artisans train for three years before stitching their first clutch and its bags have waiting lists rumoured to be years long, including the Kelly, named after Grace Kelly who once famously shielded herself from paparazzi with a Hermès handbag, and the Birkin, created after the British actor Jane Birkin bumped into a Hermès executive on a plane and complained the Kelly wasn't big enough for everyday use. Recently a vintage crocodile Birkin fetched a record €63,800 at auction in Paris.

Arnault has rarely been out of the headlines in France. His recent application for Belgian citizenship caused outrage and political debate over tax and inheritance issues in France, before he told Le Monde he was staying put and had never intended to stop paying tax in France. A close friend of Sarkozy, he built his empire by spotting family tensions, and buying companies such as Louis Vuitton and Moët & Chandon from their founding families. This is not his first "handbag war" – he also had a failed standoff over Gucci with rival French businessman François Pinault.

If the stock market watchdog rules against him, in a decision expected later this summer, he could be fined millions of euros, a drop in the ocean of LVMH's net 2012 profit of €3.42bn. But LVMH is determined to keep its stake in Hermès.

Last week the Colbert committee of 75 French luxury houses, including Hermès and Dior, complained that the image of insecurity on Parisian streets, including wealthy Chinese tourists being attacked by pickpockets and thieves, was threatening the luxury fashion industry.

It remains to be seen whether the Hermès-LVMH dispute, now likely to continue for years, will also affect the luxury brands' image.