Panama's ex-dictator Manuel Noriega on Tuesday dismissed charges of laundering drug money as an "imaginary banking scheme" concocted by the United States as he took the stand in a French court.

The 76-year-old general denied taking payments from Colombian drug lords in the 1980s and told a Paris courtroom that cash deposits transferred to French banks came from his legitimate businesses and the CIA.

"I say with much humility and respect that this is an imaginary banking scheme," Noriega told the court in Spanish through his interpreter on the second day of his trial.

"I will have the opportunity to produce documents that show that I was a victim of a conspiracy mounted by the United States against me," he said.

Noriega, who ruled Panama from 1983 to 1989, spent 20 years in a Miami cell for drug trafficking and money laundering and now faces the prospect of another decade in a French prison if convicted.

His lawyers argue that the charges against Noriega, who was extradited to France two months ago, hinge on dodgy testimony from ex-drug traffickers who were paid and given protection by US authorities.

Once a close US ally, Noriega testified that Washington turned against him in the 1980s when he refused to allow Panama to become a staging ground for operations against leftists across Central America.

"That's when the propaganda started against me after so many years of cooperation with the United States," he told the court as his three daughters sat nearby, listening attentively.

Presenting himself as a "professional soldier," the ex-leader strongly denied dealings with Colombian drug cartels and said that on the contrary, he had fought narco-traffickers while in power in Panama in the 1980s.

"I energetically fought against the drug trade and for this I received praise from the United States, Interpol and many other countries," he said, wearing a dark suit and white shirt.

Waving his hands at times to underscore his arguments, Noriega recounted that he had ordered a raid against a cocaine laboratory and waged other drug-fighting campaigns.

"Based on these actions, I could not be friends with these gangs," he said, referring to the Colombian drug cartels.

The pock-marked general known as "Pineapple Face" was arrested by US troops that invaded Panama in December on a mission to arrest him and bring him to trial in the United States.

The ex-leader was extradited to France on April 26 to answer charges of laundering the equivalent of 2.3 million euros (2.8 million dollars) from the Medellin cartel through French banks in the late 1980s.

A French court in 1999 sentenced Noriega in absentia to 10 years in prison and a fine of some 13.5 million euros, but for years he fought extradition from his prison cell in Miami.

French prosecutors say that drug money funnelled in the late 1980s was used by Noriega's wife and a shell company to buy three luxury apartments in Paris.

Much of the hearing on Tuesday was devoted to questions about Noriega's bank accounts and his ties to the now-defunct BCCI bank, that allegedly handled his financial affairs.

Asked about the source of millions in cash deposits at the bank, Noriega explained that the funds came from successful business ventures including duty-free sales at Panama airport and life insurance policies.

After some three hours of testimony, Noriega's lawyer Olivier Metzner asked him point blank if the funds in French bank accounts were drug money.

"These funds were acquired in a transparent way. They come from my personal earnings," he said. "And from the CIA?" added Metzner, to which Noriega responded by nodding.

The one-time strongman who was a key asset for the Central Intelligence Agency in the early 1980s fell out with Washington after turning his strategically important Central American country into a hub for narco-trafficking.

Convicted in the United States on charges of drug-trafficking and money-laundering, Noriega was sentenced to 40 years in prison in a Florida court. His time was reduced to 17 years for good behaviour.

The trial wraps up on Wednesday and a verdict could come as early as next month.