The sexual assault case against former IMF chief Dominique Strauss-Kahn was close to collapse on Friday, sources close to the case said, in a dramatic turnabout that could upend French politics again.

Strauss-Kahn, 62, was a steward of the world economy and a leading candidate for next year's French presidential election until he was arrested on May 14 and charged with the attempted rape and sexual abuse of a hotel maid in New York.

Strauss-Kahn arrived at court shortly before a hearing to seek changes to his bail conditions was to begin at 11:30 a.m. (1530 GMT). His wife, Anne Sinclair, was at his side when he left the house where he was being held under house arrest.

The New York Times reported that prosecutors met with Strauss-Kahn's lawyers on Thursday and the parties were discussing whether to dismiss the felony charges.

It said Strauss-Kahn could be released without bail.

A source familiar with the probe told Reuters prosecutors now doubted the maid's credibility as a witness.

The arrest forced his resignation from the International Monetary Fund and appeared to end his presidential hopes, weeks before he had planned to declare his candidacy.

Strauss-Kahn's supporters in the French Socialist party voiced delight at the apparent reversal and some said they hoped he might re-enter the 2012 presidential race.

But political analysts said his reputation had been too tarnished for him to be a presidential contender, although he could play an influential political role if cleared.

The damage to his reputation ... makes the idea he could be a candidate very hypothetical, it's science fiction, said Christophe Barbier, editor of L'Express weekly.

The case has hinged on the accuser, a 32-year-old Guinean immigrant who cleaned the $3,000-a-night suite at the Sofitel hotel in Manhattan where Strauss-Kahn was staying.

The New York Times quoted a source close to the investigation as saying the housekeeper had lied repeatedly and prosecutors no longer believed her account of the circumstances of the sexual encounter or of her own background.

The woman's brother told Reuters in Guinea that she was the victim of a smear campaign. These are lies that have been invented to discredit my sister, the man, called Mamoudou, said by telephone from his home region of Labe, 200 miles north of the Guinean capital, Conakry.

Police and prosecutors initially trumpeted the woman's credibility, confident in her story that the IMF chief emerged naked from the bathroom, chased her down the hall and forced her to perform oral sex on him. Evidence showed semen was found on her uniform collar, a source close to the investigation said.

But defense lawyers challenged the allegation of a violent assault, suggesting a defense built on consensual sex.

Another source close to the case said that the district attorney's office took the case to a grand jury without fully checking out the woman's bona fides.

Just about everything that was reported on this woman early on was untrue but no one checked or wanted to believe anything else, the source told Reuters.

FREE SOON?

Conservative French President Nicolas Sarkozy, who nominated his Socialist rival for the powerful IMF post, has maintained silence on the affair since Strauss-Kahn's arrest. His office had no comment on the latest turn of events.

Strauss-Kahn resigned from the IMF on May 19 and pleaded not guilty on June 6, vehemently denying the allegations. He faces up to 25 years in prison if convicted.

With his resignation, Strauss-Kahn severed all his ties to the IMF. Christine Lagarde, who has just stepped down as French finance minister, takes over the top IMF job on Tuesday.

The case has prompted agonized debate in France on gender equality and a media tradition of respecting the privacy of politicians' sex lives.

PERP WALK IRKED FRENCH

After his arrest, Strauss-Kahn was paraded handcuffed before cameras in a perp walk that drew outrage in France, where the American tradition was viewed as barbaric.

After four nights in Rikers Island prison, he was allowed to post $1 million cash bail and a $5 million bond. He was placed under house arrest in Manhattan, equipped with an electronic monitoring device and under the 24-hour watch of armed guards.

Some commentators suggested that Strauss-Kahn, known as the great seducer of French politics, could have been set up by opponents or in a extortion bid.

The front-runner in the polls for the April 2012 presidential race before his arrest, Strauss-Kahn had been widely expected to challenge Sarkozy.

His arrest opened the field for several other Socialist candidates, including party leader Martine Aubry, who trails fellow socialist Francois Hollande in opinion polls.

This is amazing news for Dominique, for Anne Sinclair, for his family. I think they must have the impression this morning that they are waking up from a terrible nightmare, said Socialist lawmaker Jean-Marie Le Guen, who is close to Strauss-Kahn.

All those who believed in Dominique's innocence, and in the fact that the elements as they were reported were incompatible with his personality, will feel vindicated.

Some analysts said that if fully cleared, Strauss-Kahn could lend economic credibility as an adviser to a Socialist candidate and might eventually emerge as a contender to be prime minister or finance minister.

The New York Times quoted two well-placed law enforcement officials as saying prosecutors had found issues with the accuser's asylum application and possible links to criminal activities, including drug dealing and money laundering.

They had also discovered that the woman had made a phone call to an incarcerated man within a day of her encounter with Strauss-Kahn in which she discussed the possible benefits of pursuing the charges against him, the paper said.

The conversation was recorded. The man was among a number of individuals who had made multiple cash deposits, totaling around $100,000, into the woman's bank account over the last two years, The New York Times said.

(Additional reporting by Mark Hosenball, Marie Maitre and Geert De Clercq in Paris and Saliou Samb in Guinea; Writing by Daniel Trotta and Paul Taylor, Editing by Mark Trevelyan)