The sexual assault case against former IMF chief Dominique Strauss-Kahn is near collapse, sources said, raising the prospect of a dramatic return to France's presidential election race.

Strauss-Kahn, 62, was a steward of the world economy and a leading candidate for the French presidency when he was arrested on May 14 and charged with assaulting a hotel maid in New York.

The arrest forced Strauss-Kahn's resignation from the International Monetary Fund and appeared to end his presidential ambitions, but his political career could be revived if prosecutors drop their case against him.

In a dramatic turnabout, a source familiar with the case said on Thursday night that prosecutors now had their doubts about the maid's credibility as a witness.

"The credibility is in question," the source, speaking on condition of anonymity, told Reuters.   

From the start, the case hinged on the purported victim, 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.

Police and prosecutors initially trumpeted her credibility, and evidence showed that semen was found on the collar of her maid's uniform, a source close to the investigation said.

But defense lawyers challenged the claim 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.   

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 on his own recognizance and freed from house arrest and that prosecutors may try to require that he plead guilty to a misdemeanor, but that his lawyers were likely to contest such a move.

Strauss-Kahn's defense attorney, Benjamin Brafman, said earlier on Thursday that his client would go back to court in New York on Friday at 11:30 am (1530 GMT) before Judge Michael Obus to seek changes to his bail conditions.

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

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

An acquittal of Strauss-Kahn could throw France's presidential race open again. The front-runner in opinion polls for the April 2012 presidential race before his arrest, Strauss-Kahn had been widely expected to challenge President Nicolas Sarkozy.

His arrest opened the field for several other Socialist Party candidates, including party leader Martine Aubry. She said this week she would seek the nomination in a selection contest that will wind up in October.

Aubry trails fellow socialist Francois Hollande in opinion polls, setting up a leadership battle on the Socialist side.

If Strauss-Kahn were cleared and he could recover from the scandal, he could decide to run himself or at least help bring back unity in the socialist camp.

The New York Times quoted what it said were two well-placed law enforcement officials as saying that although forensic evidence showed there had been a sexual encounter between the Strauss-Kahn and the maid, the accuser had repeatedly lied.

It said prosecutors had discovered issues involving the asylum application of the 32-year-old housekeeper, who is Guinean, and possible links to criminal activities, including drug dealing and money laundering.   

The paper added that prosecutors had discovered that the woman had had a phone conversation with 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 conversation was recorded.   

It added that the man, who had been arrested on charges of possessing 400 pounds (180 kg) of marijuana, 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. - Reuters