Fortescue Metals Group (ASX: FMG) and its chief executive Andrew Forrest are being sued by top US investor Leucadia National (NYSE:LUK) for alleged "misleading and deceptive conduct".

The legal challenge came after a brash move by the Perth-based company that could secure billions of dollars of interest-free funding for iron ore expansions.

Leucadia, a New York hedge fund that owns 8 per cent of Fortescue, said overnight it had filed a writ of summons against both the Australian mining company and Mr Forrest in WA's Supreme Court.

The dispute is on whether Fortescue has the right to issue subordinated notes that will dilute Leucadia's right to pocket a proportion of the iron ore miner's future revenue.

Luecadia said Fortescue's claim that it had the right to issue additional notes identical to the $US100 million subordinated note held by Leucadia was "extraordinary".

Interest payments, under the terms of the 2006 subordinated loan note, are 4 per cent of revenue after royalties from the FMG's Cloud Break and Christmas Creek iron ore mines until 2019.

The New York Stock Exchange-listed company is seeking damages under the Australian Trade Practices Act 1975, Corporations Act 2001, Australian Securities and Investments Commission Act 2001 and Fair Trading Act 1987 against Fortescue and Forrest for "misleading and deceptive conduct."

Fortescue denied the allegations and said it would defend itself vigorously. "The note deed poll on its face allows the issuance of further notes and it is therefore a proper and appropriate course of action for Fortescue to examine," a Fortescue spokesman said.