PARIS Christine Lagarde's deft handling of the G20 presidency has made the French finance minister a frontrunner to become the first woman to run the IMF, but a potential legal inquiry could yet upset her chances.
With Europe pushing hard to keep the IMF leadership in the wake of Frenchman Dominique Strauss-Kahn's resignation after his arrest for attempted rape, Lagarde has emerged as Europe's strongest candidate to fend off the claim of emerging economies.
Her fluent English and more than two decades of practicing law in Chicago enhance her transatlantic appeal.
However, her prospects could be undermined by a legal row, unlikely to be resolved before June at the earliest, over her decision to settle a dispute between the state and businessman Bernard Tapie, a personal friend of President Nicolas Sarkozy.
Lagarde denies any misconduct, and there is no suggestion of personal profit. But legal trouble could delay her appointment or even make her unacceptable to the IMF as it tries to polish its image after Strauss-Kahn's dramatic fall from grace.
"This weighs on Lagarde's candidacy. I don't see anyone putting someone with an affair like this hanging over them at the head of the IMF," said one French parliamentary source. "Lagarde would be legitimate if it wasn't for the Tapie case."
Lagarde says some are trying to sully her reputation, and even some leading opposition politicians have expressed regret that she is under scrutiny, saying the ultimate decision to go to arbitration came from Sarkozy's office.
"There is no new evidence in this case. My reaction is... calmness about its content but indignation about the way it is being handled," Lagarde said earlier this month.
Lagarde has won admirers from Washington to Beijing for skillfully balancing the interests of the world's major economies under France's Group of 20 presidency while making progress on guidelines to avoid a repeat of the global financial crisis.
Lagarde, 55, has also received plaudits for her instrumental role in approving a bailout mechanism to aid struggling members of the euro zone last May, making her well-placed to lead the multilateral lender as it grapples with Europe's debt crisis.
Officials in Berlin say Lagarde is liked and respected by Chancellor Angela Merkel, while European colleagues such as Swedish Finance Minister Anders Borg and Luxembourg Prime Minister Jean-Claude Juncker, who presides over meetings of euro zone ministers, have publicly backed her for the job already.
In France, officials say that, though her appointment would deprive Sarkozy of a popular minister ahead of the 2012 presidential election, it would also hand him a powerful ally to promote his agenda for the G20 and the euro zone crisis.
Next week's Group of Eight summit in France gives Sarkozy the perfect opportunity to lobby the leaders of most of the IMF's main stakeholders on Lagarde's behalf, if he chooses to.
In a Reuters poll, 32 of 56 economists said Lagarde was the person most likely to be named to the post.
"Lagarde is Europe's joker in the pack. No one else has her profile," said one source close to IMF thinking. "The main problem is her judicial case. The most important thing for the IMF Board right now is a clean bill of health."
On May 10, a public prosecutor recommended a full judicial inquiry into Lagarde's role in awarding a 285 million euro payout to Tapie, a former left-wing minister whose support for Sarkozy's 2007 presidential campaign helped to discredit his Socialist rival.
Tapie had sued the government, alleging that the former state-owned bank Credit Lyonnais had defrauded him during the sale of his stake in the sports company Adidas in 1993.
Opposition deputies accused Lagarde of abuse of authority after she dropped a legal battle with Tapie in a bid to end the long-running case and submitted it to an arbitration panel, overruling officials in her ministry.
The prosecutor alleges that Lagarde ignored recommendations to check if the arbitration process was legal, and refused recommendations to appeal against the hefty compensation award.
Three judges now have to decide whether to proceed with the case against her or drop it.
"There is no deadline on the statutes but this should take around a month," said a prosecutor. "It's almost impossible for them to take a quick decision, given how technical the case is."
Timing could be crucial. If the IMF seeks to fill the post quickly to turn the page on the sex scandal and press ahead with its European rescue packages, that could rule Lagarde out.
"It could take a while until she's clear and that could be a problem as far as the IMF is concerned," said Jacques Reland of the Global Policy Institute.
U.S. Secretary of State Timothy Geithner appeared to give Lagarde breathing space on Wednesday by suggesting the IMF should name an internal head on an interim basis.
But Merkel said on Thursday that, while she wanted a European in the job, it was important to find a quick solution.
A final deadline could be September 1, when acting managing director John Lipsky's term ends. This could leave the IMF rudderless as the naming of a new deputy is the prerogative of the managing director, not the Board.
Europeans, who have controlled the Washington-based lender since its creation in 1945, insist that it must be a European who does the job at a time when the IMF is heavily involved in the "old Continent's" debt crisis.
While Geithner called for an "open process," sources close to the IMF and the U.S. Treasury said that in the end Washington will back a European for the top job so as not to jeopardise its own captaincy of the World Bank.
Lagarde would be likely to continue Strauss-Kahn's policy, which softened the Fund's "orthodox" approach to stabilisation policy and opposed debt restructuring in Europe.
Though Lagarde is not a trained economist, her strengths include stamina, negotiating skills and flawless English.
Lagarde has refused to comment on reports of her candidacy, though she is understood to welcome the prospect of a return to the United States, where she worked as the first female head of the Chicago law firm Baker & Mckenzie before being recruited in 2005 by France's then-prime minister, Dominique de Villepin.
One senior European source said Lagarde already had backing from Washington and several large developing countries.
The court case is one of very few blemishes in Lagarde's four years as minister -- the second-longest tenure of any French finance minister of modern times.
She has made a handful of gaffes -- angering the French by telling them to take to bicycles when fuel prices rose -- and recently had an investment called briefly into question.
"Christine Lagarde is an extremely well-qualified candidate ... It would be inappropriate to decide to go for someone who is less qualified simply because they are non European," said DeAnne Julius, head of the Chatham House think-tank.
"I'm always in favor of a qualified woman getting a high profile job, so I think that would be an added plus."
Former Turkish economy minister Kemal Dervis is regarded as her main rival, combining impeccable emerging market credentials with experience of the World Bank and United Nations.
(Additional reporting by Emmanuel Jarry and Thierry Leveque in Paris, Andreas Rinke in Berlin and Julian Toyer in Brussels; Editing by Kevin Liffey)