Lagarde, 60, will be tried for negligence by the Court of Justice of the Republic, a tribunal that hears cases against ministers accused of wrongdoing in the discharge of their duties.
The International Monetary Fund boss, who has repeatedly protested her innocence, faces up to a year in prison and a fine of 15,000 euros ($16,850) if found guilty.
The case threatens to overshadow Lagarde’s otherwise stellar career, which has seen the former corporate lawyer progress from a top firm to the French finance ministry and her current role as one of the world’s most powerful women.
It also threatens the credibility of the Washington-based IMF, whose last three managing directors have faced trial.
The Fund’s head of communications Gerry Rice said in a statement sent to AFP on Monday that the executive board “continues to express its confidence in the managing director’s ability to effectively carry out her duties.”
The accusations stem from Lagarde’s handling of a dispute with Tapie, a colourful businessman and former minister who claimed a state bank defrauded him in its sale of sportswear giant Adidas.
Tapie owned Adidas between 1990 and 1993 but lost control of it after he went bankrupt. He also owned the Marseille football team.
On becoming finance minister in 2007 under the newly elected president Nicolas Sarkozy, Lagarde ordered that Tapie’s long-running battle with the state be resolved by arbitration.
The decision was hugely costly, with Tapie initially walking away with a staggering 404 million euros ($445 million) in compensation in 2008. After a lengthy court battle, he has since been ordered to repay it.
Investigators suspect the arbitration process was rigged in favour of Tapie, who had supported Sarkozy in his 2007 election campaign.
Lagarde, who served as finance minister from 2007 until 2011, has always insisted she acted in France’s best interests.
Although she is not accused of personally profiting from the payment, she has been criticised for failing to challenge the award.
Investigating magistrates accuse her of “serious negligence on the part of a minister tasked with conducting affairs of state,” saying Lagarde’s actions led to a gross “misuse of public money”.
Others face fraud charges over the affair, including Tapie, his lawyer, one of the arbitrators, Lagarde’s former chief of staff in the finance ministry and the current head of the telecom group Orange, Stephane Richard.
Hearings in Lagarde’s trial could take place from the opening on December 12 until December 20, a judicial source told AFP.
She will be judged by a panel of three judges and 12 MPs selected from France’s upper and lower houses of parliament.
The silver-haired mother of two succeeded her disgraced compatriot Dominique Strauss-Kahn as IMF managing director after he resigned to fight sexual assault charges.
Another former IMF head, Spaniard Rodrigo Rato, has also been ordered to stand trial for misusing funds when he was head of Spanish lender Bankia.
The IMF plays a key role in the global financial system, acting as a lender of last resort to countries in financial difficulties. It also monitors financial markets and acts as an influential policy advisor to governments.
Lagarde has been a key player in bailout negotiations for Greece and has also worked to reform the US- and Europe-dominated institution to take China’s increased clout into account.
She has fashioned herself as a model for talented women fighting male dominance in the IMF and other large organisations and has previously been touted as a possible French presidential contender although she denies any such ambitions.