Ms Stewart had hoped to avoid criminal charges

Separately, the Securities and Exchange Commission (SEC), the US stock market watchdog, sued Ms Stewart for "illegal insider trading."

The charges follow a year-long investigation by US prosecutors into Ms Stewart's sale of shares in biotech firm ImClone Systems in late December 2001.

Ms Stewart sold the shares the day before regulators rejected ImClone's application to market the cancer drug Erbitux, forcing the company's share price sharply lower.

The SEC alleged that Ms Stewart sold the shares after her stockbroker told her that former ImClone chief executive Sam Waksal and members of his family were selling their own ImClone stock.

"It is fundamentally unfair for someone to have an edge on the market just because she has a stockbroker who is willing to break the rules and give her an illegal tip," said Stephen M. Cutler, the SEC's Director of Enforcement.

Tip-off

Mr Waksal, a friend of Ms Stewart's, last year pleaded guilty to various fraud charges stemming from his role in the sale of ImClone stock.

It was alleged that Mr Waksal had advance warning in December 2001 that ImClone's application to market Erbitux would be rejected, and tipped off relatives and associates who held the company's shares.

Peter Bacanovic, the former Merrill Lynch stockbroker who acted for Ms Stewart, was charged with obstruction of justice and perjury on Wednesday.

Ms Stewart and Mr Bacanovic both pleaded not guilty to all charges.

Ms Stewart's lawyers later said the charges against her were "baseless."

"The government is making her the subject of a criminal test case designed to further expand the already unrecognizable boundaries of federal securities laws,'' they said.

Sell order

Ms Stewart has previously claimed that she had instructed her stockbroker to sell her ImClone shares as soon as their price fell below a certain threshold.

The criminal charges against Mr Bacanovic and Ms Stewart stem from an alleged attempt to cover up the events leading up to Ms Stewart's sale of ImClone shares.

There had been speculation that Ms Stewart would also face criminal insider trading charges. It is thought that prosecutors decided against this because insider trading would have been too difficult to prove in a criminal case.

The burden of proof in civil cases, such as the one brought against Ms Stewart by the SEC, is lower.

Reports that Ms Stewart was about to face criminal charges began to circulate earlier this week, wiping about 20% off the market value of her company, Martha Stewart Living Omnimedia.

Shares in the firm had already lost half their value since the scandal first broke last year.