Ms Lagarde, who was French finance minister at the time of the deal in favour of tycoon Bernard Tapie, is accused of negligence in the case. She has denied wrongdoing.
A special court ruled in December that Ms Lagarde should stand trial, but she appealed. France’s Court of Cassation yesterday rejected the appeal.
Ms Lagarde’s lawyer Patrick Maisonneuve expressed disappointment at the decision, but said that he expects the trial to show that the IMF chief did nothing wrong.
The unusually generous 2008 arbitration deal, paid from public funds, prompted years of legal disputes that remain unresolved.
The investigation began in 2011, soon before Ms Lagarde was named to head the IMF in the wake of sexual assault allegations against her predecessor, French economist Dominique Strauss-Kahn.
IMF spokesman Gerry Rice said yesterday that the Executive Board “continues to express its confidence in the managing director’s ability to effectively carry out her duties”.
The decision last year to send her to trial had come as a surprise because a prosecutor had earlier argued that the case against her should be dropped.
“Negligence” by a person invested with public authority carries a risk of up to a year in prison and a €15,000 fine.
She will be tried at the Court of Justice of the Republic, a special body that tries government ministers for alleged wrongdoing while in office. A date has not been set for the trial.
The case is part of a larger legal saga focusing on Tapie, a flamboyant magnate and television star who had sued French bank Credit Lyonnais for its handling of the sale of his majority stake in sportswear company Adidas in the mid-1990s. With Ms Lagarde’s approval, a private arbitration panel ruled that he should get €400m in compensation, including interest.
The deal was seen by critics as a sign of a too-close relationship between magnates and the French political elite. Tapie was close to then-president Nicolas Sarkozy, Ms Lagarde’s boss.
In a separate part of the case, Tapie has been ordered to pay back the entire €400m. An appeals decision is pending. He could also face a criminal trial on fraud charges, which would be separate from Ms Lagarde’s trial.