Lawyers for former Democratic vice presidential nominee John Edwards are bracing for the possibility that he will soon face federal campaign finance charges and indicated Wednesday that they would vigorously fight any indictment.

Charges against the former North Carolina senator and two-time presidential candidate appear increasingly likely. A federal grand jury in North Carolina has been examining Edwards’s role in funneling money from political donors to a former campaign aide, Rielle Hunter, in a possible attempt to cover up an extramarital affair, sources familiar with the investigation have said.

Sources said Wednesday that Justice Department officials in Washington have authorized prosecutors to seek an indictment of Edwards if they cannot otherwise resolve the matter. The sources, who spoke on the condition of anonymity because the investigation is not public, said Edwards is in active plea negotiations with prosecutors from the department’s Public Integrity Section.

An attorney for Edwards, Gregory Craig, issued a statement Wednesday indicating that the government is preparing a criminal case. He strongly denied any illegal activity by Edwards and accused prosecutors of exaggerating the strength of the allegations.

“John Edwards has done wrong in his life — and he knows it better than anyone — but he did not break the law,” Craig wrote. “The Justice Department has wasted millions of dollars and thousands of hours on a matter more appropriately a topic for the Federal Election Commission to consider, not a criminal court.”

Craig added that “the government’s theory is wrong on the facts and wrong on the law. It is novel and untested. There is no civil or criminal precedent for such a prosecution.” Lawyers often use the term “theory” to describe the government’s legal argument in a case.

Justice Department officials declined to comment on the possible charges, which were first reported by ABC News. Sources said the outcome — likely to be an indictment or an agreement that Edwards would plead guilty to a lesser offense — could be determined as soon as next week.

A source familiar with Edwards’s thinking said the former candidate “doesn’t want to go to jail” but “is not going to roll over” in plea discussions. “He is raising two young kids. He’s a single father. He wants his life, and he doesn’t want to be tied up in this any longer than he needs to,” the source said.

The possibility that Edwards, a onetime trial lawyer legendary in North Carolina for his courtroom skills, could become a criminal defendant marked another step in the downfall of a politician once seen as brimming with potential. Edwards’s political career was destroyed by the exposure of his affair with Hunter, a videographer for his 2008 presidential campaign, and his initial denials that he had fathered a child with her.

In January 2010, Edwards admitted to being the father of Hunter’s daughter, Quinn. Shortly afterward, he separated from his wife, Elizabeth Edwards, also a prominent Democratic activist; she died in December after a long bout with cancer.

Any trial would also feature a high-stakes legal showdown between Craig, President Obama’s former White House counsel, and the Obama Justice Department. Obama defeated Edwards for the 2008 Democratic nomination, and Edwards was once said to be interested in the job of attorney general.

The federal investigation has been underway since at least early 2009,when Edwards confirmed that political groups linked to him were among the potential targets of a probe into his finances. Sources familiar with the probe have said that investigators are focusing on whether money paid to Hunter and former Edwards campaign aide Andrew Young constituted campaign donations, since the funds helped the campaign by keeping the affair secret.

One source who testified before the grand jury said Wednesday that he was asked about the payments to Hunter and Young and whether Edwards had ever directed the solicitation of those funds. The source said he answered that he was unaware of any involvement by Edwards.

Staff researcher Julie Tate and staff writers Chris Cillizza, Matt DeLong and Karen DeYoung contributed to this report.