By Kathy Finn

NEW ORLEANS (Reuters) - Former New Orleans Mayor Ray Nagin, the colorful and controversial spokesman for the city after the devastating Hurricane Katrina in 2005, is under investigation by federal authorities, a source with direct knowledge of the probe said.

The source told Reuters on Friday that several people linked to Nagin or the New Orleans city administration during his two terms as mayor ending in 2010 were cooperating with the U.S. Justice Department and the FBI.

The investigation includes whether Nagin received favors or items of value from vendors to the city in return for contracts they received while Nagin was in office, the source said.

Nagin, who was in Minnesota for a speaking engagement on Friday, spoke to a WWL-TV reporter at the New Orleans airport on his return. Asked about allegations he benefited personally while in office, he said:

"They're three years old, and they keep coming up. I only want an opportunity to finally deal with them. Hopefully we can have an honest, open approach where truth and justice can prevail, but I'm starting to worry about that now," Nagin said.

A Justice Department spokeswoman in Washington had no comment. The U.S. attorney in New Orleans, Jim Letten, did not return a call requesting comment. A spokeswoman for FBI Special Agent in Charge David Welker declined to comment on whether an investigation is underway.

Nagin was thrust into the national spotlight in 2005 when Hurricane Katrina overwhelmed levees and flooded 80 percent of the city, killing 1,500 people and causing more than $80 billion in damage.

Thousands of New Orleans residents were displaced, especially poor African-Americans, and many were relocated to other cities in the region for months or left New Orleans permanently.

As mayor during the crisis, Nagin publicly clashed with federal and state officials over relief efforts and was accused of making statements during the crisis that inflamed passions.

Nagin, who is black, was criticized for racial divisiveness after Katrina for urging residents to rebuild a "chocolate New Orleans," referring to its majority African-American population.

He was re-elected mayor in 2006 but critics said he did not do enough to revive the city in his second term.

Since leaving office in 2010, speculation has swirled that Nagin would eventually become the target of a federal probe after a former associate and close personal friend pleaded guilty to conspiring to defraud the city.

Gregory Meffert, the city's former chief technology officer under Nagin, pleaded guilty in 2010 to conspiracy to commit wire fraud and bribery in connection with a city program receiving federal funds, and filing a false tax return. He is scheduled to be sentenced in May.

New Orleans attorney and Loyola University law professor Dane Ciolino said a probe of Nagin was no surprise.

"Ever since Meffert pleaded guilty there has been serious speculation that he was cooperating against Ray Nagin," Ciolino said Friday.

(Additional Reporting by Jim Vicini; Editing by Corrie MacLaggan, Greg McCune and Eric Beech)