The International Monetary Fund (IMF) has been plunged into a leadership crisis at the height of world financial turmoil by allegations that its managing director had an affair with a married employee.

The IMF has begun an investigation into whether Dominique Strauss-Kahn, the former French Socialist finance minister, acted improperly by showing favouritism to Piroska Nagy, a Hungarian official in the fund’s Africa department.

Investigators are also examining a payoff received by Nagy when she resigned in August before taking a job with the European Bank for Reconstruction and Development in London.

Robert Litt, her lawyer, denied that she had received “special treatment”.

The alleged affair is said to have come to light when Nagy’s husband Mario Blejer, an Argentine-born economist who once worked at the Bank of England, discovered reportedly compromising e-mails.

Strauss-Kahn, 59, who is married to Anne Sinclair, one of France’s most popular television presenters, said in a statement yesterday that he was “continuing to cooperate” with the investigation into what he described as an “incident which occurred in my private life”. He added: “At no time did I abuse my position as the fund’s managing director.”

The wrangle threatens serious embarrassment for President Nicolas Sarkozy of France, who campaigned last year to install his former political rival as the IMF’s chief executive. After British complaints that the job should go to a candidate from outside Europe, Strauss-Kahn’s appointment was seen as a triumph for France.

Yet Paris insiders were warning that the charming and charismatic leftwinger – widely known by his initials, DSK – had a potentially perilous weakness for women. Once regarded as the prototype “champagne socialist”, Strauss-Kahn had combined a glamorous Parisian lifestyle with a highflying political career that was once expected to earn him the French presidency.

Jean Quatremer, the veteran Brussels correspondent of Libération, the French daily newspaper, stirred a row about politicians’ private lives when he wrote that DSK’s “only real problem” was his fondness for women.

Strauss-Kahn was also at the centre of a titillating mystery involving Yasmina Reza, France’s most celebrated playwright, who published an intimate portrait of Sarkozy last year. The book L’Aube, le Soir ou la Nuit (Dawn, Evening or the Night) was dedicated enigmatically to “G”. French literary sleuths promptly concluded that the G was Strauss-Kahn, whose middle name is Gaston.

Reza refused to confirm G’s identity.

Strauss-Kahn, 59, took office shortly after Paul Wolfowitz, the former Pentagon chief who became head of the World Bank, was forced to resign following allegations that he had shown favouritism to an employee with whom he had a long-standing relationship.

While that episode served mainly to reopen bitter differences between Wolfowitz’s supporters and those who blamed him for the Iraq war, it also exposed a cultural divide between the West and other nations about the standards expected from political leaders.

The Wall Street Journal reported that Strauss-Kahn had sent e-mails to Nagy discussing a possible relationship, which began earlier this year during a conference in Europe.

A lawyer for Nagy said that she “doesn’t comment on her personal life”.

Explore UK News

• Crime News

• Education News

• Health News

• Science News

• Scotland News

Times Recommends

• Donor organ allowed child’s own heart to heal
• Michael Jackson: Not the final chapter
• Sacha Baron Cohen forced to tone down Brüno