It's alleged that Redford awarded the lawsuit contract in 2011 to a group of law firms that included her former husband, Robert Hawkes, when she was justice minister.
Alberta Liberal Leader Raj Sherman says Redford is in a potential conflict of interest and asked the ethics commissioner to investigate.
In a letter to Sherman, Ethics Commissioner Neil Wilkinson writes that he has launched a probe into the allegation and has informed Redford of his decision.
"I have commenced an investigation as you requested," Wilkinson wrote in a letter that the Alberta Liberals released to the media Monday. "The member has been notified of my decision."
Redford told the Alberta legislature in November that accusations that she was in conflict of interest over the tobacco litigation contract are "absolutely inaccurate and false."
The government's lawsuit is seeking to recover $10 billion from tobacco companies for the estimated cost of caring for patients dating back to the 1950s.
Brad Odsen, a lawyer for the Ethics Commissioner's office, said the investigation will focus on whether Redford breached Section 2 of Alberta's Conflicts of Interest Act.
Section 2 deals with whether a decision made by a member of the legislature has benefited a person directly associated with the member.
Odsen said when the review is complete a report will be presented to the Alberta legislature.
If there is a conflict, the report may recommend sanctions including a reprimand, a financial penalty or suspending or expelling a member from the legislature.
Any recommended sanction would be put to members of the legislature for a vote.
Odsen said the public should not read anything into the fact that the ethics commissioner is investigating.
"This office has a duty when a request for an investigation is made," he said. "We don't know at this point if there are any serious grounds or not."
Alberta Justice Minister Jonathan Denis issued a statement Monday on behalf of the premier in response to the ethics probe.
He said the contract signed with International Tobacco Recovery Lawyers in June 2011 was made four months after Redford had left cabinet to run for leader of the Progressive Conservative Party.
“As Premier Redford stated earlier, she welcomes the review by the ethics commissioner and the Government of Alberta stands by our intention to recover money owed to Albertans by big tobacco, who for years misled people about the dangers of smoking," he said.
"That is what this is about. That is what we’re fighting for."
Denis said the consortium of lawyers that were chosen offered the lowest cost of all bids received and the decision was in the best interests of taxpayers.
Alberta's Opposition Wildrose party said it will send the ethics commissioner what it called "overwhelming evidence" that Redford was involved in awarding the lawsuit.
"The premier was the primary decision maker," Wildrose member Rob Anderson said. "If this is not a breach of our ethics legislation, then we may as well just throw out the entire Act."
New Democrat Leader Brian Mason said he is pleased that the ethic's commissioner is looking into the allegations and hopes that the review will be thorough.
"While the premier repeatedly claimed that she wasn't involved in the decision, all of the evidence suggests otherwise."
Also on HuffPost