She was finance minister in President Nicolas Sarkozy's government at the time of the compensation award to Bernard Tapie for the sale of a firm.
Mr Tapie supported Mr Sarkozy in the 2007 presidential election.
Ms Lagarde's lawyer described the court's decision as "incomprehensible", and said the IMF boss would appeal.
In a statement she said she had "always acted in this affair in the interest of the state and in respect of the law", according to AP.
Mr Tapie was once a majority shareholder in sports goods company Adidas but sold it in 1993 in order to become a cabinet minister in Francois Mitterrand's Socialist government.
He sued the Credit Lyonnais bank over its handling of the sale, alleging that the partly state-owned bank had defrauded him by deliberately undervaluing the company.
His case was later referred by Ms Lagarde to a three-member arbitration panel which awarded the compensation, causing a public outcry.
Investigators suspect he was granted a deal in return for his support of Mr Sarkozy.
Earlier this month, a French court ruled that Mr Tapie was not entitled to any compensation for that sale and should pay back the €404m with interest.