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PARIS (Reuters) - A French ex-treasury official told a court trying IMF chief Christine Lagarde for negligence on Wednesday that he had been shocked at how quickly the government had given up on contesting a huge state payout to business tycoon Bernard Tapie in 2008.
Lagarde, 60, faces charges, which she denies, of being negligent when, as French finance minister, she approved a payout to Tapie in a rare out-of-court settlement which cost the French taxpayer 400 million euros ($425 million).
The prosecution alleges Lagarde showed negligence, leading to misuse of public funds, by accepting too easily a costly arbitration settlement with Tapie and not contesting it to the benefit of the state.
Lagarde withstood aggressive questioning on Tuesday at a special court in Paris which hears cases involving government ministers. The IMF managing director faces up to a year in jail and a fine of 15,000 euros if convicted.
A maximum sentence could raise questions about her ability to hold on to her job at the Washington-based International Monetary Fund, where her French predecessor Dominique Strauss-Kahn resigned in 2011 over a sex scandal.
Evidence from Bruno Bezard, a treasury official involved in the case at the time, painted a picture of cronyism and string-pulling in Tapie's links with the government under Nicolas Sarkozy's presidency from 2007 to 2012.
He told the court on Wednesday that he was aware of "curious relationships" at the Finance Ministry at the time and suggested Tapie himself had had the run of the place.
"I recall that my employees would meet Monsieur Tapie in the ministry corridors which was rather unexpected," said Bezard, who headed a body regulating state corporate holdings which opposed a private settlement with Tapie.
The case dates back when Tapie sued the state for compensation after selling his stake in sports company Adidas to then state-owned Credit Lyonnais in 1993.
He accused the bank of defrauding him after it resold its stake for a much higher price. With the case stuck in the courts, the two sides agreed to a private settlement and a 403 million euro payout to Tapie. Lagarde approved the settlement.
Asked whether he was shocked by the speed of the arbitration ruling in Tapie's favour, Bezard replied: "I was more shocked by the speed with which we gave up on contesting it than by the speed of the arbitration decision."
Not to appeal against a "scandalous" decision was an error, he said. "Even if we had had one chance in 1,000 of winning, there were only advantages and no inconvenience," he said.
Lagarde told the court that she had spent a long time considering whether to contest the settlement but had approved it in the best interests of the state and to draw a line under an affair that had dragged on for 15 years.
Lawyers for Lagarde have said the Tapie file had been largely handled by her chief of staff at the time, Stephane Richard, who is now chief executive of French telecoms group Orange. They have suggested he had failed to pass on some necessary documents.
Richard is separately under investigation, with five others, on suspicion of embezzlement linked to the Tapie case.
He had been due to appear as a witness at Lagarde's trial but did not appear on Wednesday because, his lawyers said, any testimony he gave could prejudice the separate investigation against him. His lawyer said he "strongly contests" his absence being seen as being an admission of guilt.
Writing by Richard Balmforth; Editing by Alison Williams