The mutual funds industry is worth $7 trillion

The Securities and Exchange Commission and New York prosecutor Eliot Spitzer allege that IFG allowed big investors to execute rapid trades in its shares.

The practice, known as "market timing," erodes returns for ordinary savers.

Mr Spitzer said IFG and its boss, Raymond Cunningham, had engaged in a "massive mutual fund timing scheme."

Irregularities

Earlier on Tuesday, IFG's parent company Amvescap said IFG would "vigorously" defend itself against any charges.

Making rapid trades in mutual fund shares - known as market timing - is not illegal, but it is frowned on by many in the fund management industry.

Many fund management firms who serve small investors say they discourage market timing in their promotional literature.

The lawsuit against Invesco form part of a wider crackdown on abuses in the US mutual funds industry, which looks after the savings of about 50 million American households.

Last month, Wall Street giant Morgan Stanley paid $50m to settle a probe into its mutual fund arm.

Separately, Putnam Investments - the fifth biggest mutual fund in the US - struck a deal with regulators under which it has agreed to make good any losses suffered by its customers.

Clean-up

Across the mutual fund industry as a whole, about 30 senior managers have been suspended or have lost their jobs.

Most of the funds under investigation are accused either of market timing or of late-trading - where major investors are allowed to trade in mutual fund shares after hours at outdated prices.

Prosecutors say market-timing and late trading have allowed Wall Street insiders to prosper at the expense of ordinary savers.