The shock announcement came a day after she was grilled for more than 15 hours by a special court in Paris that probes ministerial misconduct, the fourth time she has been questioned in a case that has long weighed upon her position as managing director of the International Monetary Fund.
"The investigating commission of the court of justice of the French Republic has decided to place me under formal investigation," she said in exclusive comments to AFP.
It does not, however, always lead to a trial.
Asked whether she intended to resign from the IMF, she responded: "No." But her fate now hangs on what the IMF board of directors will decide.
"I have instructed my lawyer to appeal this decision which I consider totally without merit," said Lagarde, who replaced Dominique Strauss-Kahn as IMF chief in 2011 after he became embroiled in a New York sex scandal involving a hotel maid.
The case relates to her handling of a 400-million-euro (USD 527-million) state payout to disgraced French tycoon Bernard Tapie in 2008, which investigating judges suspect may have been doled out in return for his support of ex-president Nicolas Sarkozy in the 2007 election.
The payout to Tapie was connected to a dispute between the businessman and partly state-owned bank Credit Lyonnais over his 1993 sale of sportswear group Adidas.
Tapie claimed Credit Lyonnais had defrauded him by intentionally undervaluing Adidas at the time of the sale and that the state, as the bank's principal shareholder, should compensate him.
Investigating judges are seeking to determine whether the arbitration was a "sham" organised to reward Tapie for his support of Sarkozy.