UPDATE 1-Korea regulators launch probe into KEB over board members

* FSS kicks off probe over KEB in relation to three board members

* Probe follows recommendation owner Lone Star sack the board members

SEOUL Nov 24 (Reuters) - Officials at South Korea's Financial Supervisory Service said they had launched a probe into Korea Exchange Bank (KEB), after urging it to replace three board members including Paul Yoo, the former Seoul head of U.S. fund Lone Star who was found guilty of stock manipulation charges in October.

The move represents another possible blow to the Dallas-based buyout fund, which has contended with difficulties such as failed bidders, office raids and legal wrangling in its attempts to exit its KEB investment after buying a controlling stake in the bank in 2003.

Following the guilty verdict, regulators ordered Lone Star, which holds a majority stake in KEB, to sell down its stake to 10 percent or lower within six months. It also asked KEB to sack three board members associated with Lone Star, but an FSS official said KEB had yet to comply with the request.

After the probe, regulators will decide whether to penalise Lone Star over the matter, one official said.

The officials declined to be named due to the sensitivity of the issue.

The fund is still in a deal to sell KEB to Hana Financial Group for 4.4 trillion won, which could be South Korea's biggest banking acquisition.

The deal, which Hana and Lone Star initially struck in last November, has been bogged down by legal disputes and regulatory delays. A source told Reuters earlier that Hana would begin renegotiating the price of the deal, considering a recent tumble in KEB's shares.

The two other board members facing departure are Ellis Short, former vice chairman of Lone Star, and Michael Thomson, the fund's general counsel, according to a recent regulatory filing.

A KEB spokesman declined to comment.