UPDATE 1-Seoul court finds Lone Star guilty of stock manipulation

(Adds details, background)

* Court slaps $21 mln fine on Lone Star

* Regulator say may order Lone Star to sell down KEB stake

SEOUL, Oct 6 (Reuters) - A Seoul court ruled on Thursday that U.S. buyout fund Lone Star was guilty of manipulating stock prices of a Korea Exchange Bank (KEB) unit, clearing a legal uncertainty clouding the fund's $4.1 billion deal to sell KEB to domestic rival Hana Financial Group .

The Dallas-based firm agreed to sell a 51 percent stake it holds in South Korean lender KEB to Hana for $4.1 billion, but regulators held off approval for what could be the country's biggest banking acquisition, citing outstanding legal issues.

After the decision regulators said they expected Lone Star to be disqualified as the top shareholder of KEB and said they may order it to sell down its stake in the bank to 10 percent under banking law.

"When we order a stake disposal, we will decide methods after a legal review and a discussion," the Financial Services Commission said in a statement.

Uncertainty over the deal remains as KEB's labor union and civic groups continue to oppose the sale to Hana and are calling on regulators to attach strings to it.

Lone Star's previous attempt to sell the stake to Kookmin Bank and then HSBC failed amid regulatory delays, legal wrangling and a public backlash over perceived foreign profiteering on distressed Korean assets.

The Seoul High Court slapped a fine of 25 billion Korean won ($21 million) on LSF-KEB Holdings SCA, Lone Star's Belgium-based unit which owns a controlling stake in KEB.

Paul Yoo, the ex-head of its Korean operations , was sentenced to a three-year prison term.

Lawyers for Lone Star were not available for comment on whether they planned to appeal. ($1 = 1190.200 Korean Won) (Reporting by Hyunjoo Jin; Additional reporting by Miyoung Kim; Editing by Jonathan Hopfner and David Chance)