UPDATE 2-Papua New Guinea mutiny leader charged

(Adds quotes, details of charges, arrest, appeal to lay down arms)

SYDNEY Jan 29 (Reuters) - An army officer who led a military revolt aimed at reinstating Papua New Guinea's ousted prime minister appeared in court on Sunday on mutiny charges, police said.

Retired Colonel Yaura Sasa, who led last week's attempt to restore Sir Michael Somare to power, appeared in a court charged under the criminal code with incitement to mutiny following his arrest overnight, a police spokesman told Reuters.

Police spotted Sasa by chance at a lodge away from the Taurama barracks, where his supporters have been holed up with weapons since last week's failed mutiny, police media spokesman Superintendant Dominic Kakas said.

"He voluntarily came. He was cooperative. After the interview he was arrested and charged," police spokesman Kakas told Reuters, adding that Sasa made an initial appearance at Waigani court on Sunday morning.

"Criminal prosecutions will start as soon as we have completed our investigations. In the meantime we have appealed to the retired colonel to actually talk to his supports and make sure that they lay down their arms and let the courts deal with the issue," Kakas said.

Sasa led a mutiny on Jan. 26 in which soldiers captured and briefly detained the armed forces chief, Brigadier General Francis Agwi, who was released later the same day. Sasa said at the time he had been appointed as commander of the Papua New Guinea Defence Force by Somare.

Prime Minister Peter O'Neill declared the mutiny over late on Jan. 26, but a small group of soldiers remain at Taurama barracks, where they have been demanding a full pardon.

The mutiny follows a long-running power struggle between O'Neill's camp and Somare's supporters, who say that Somare was ousted as prime minister last year illegally. The nation's Supreme Court backed Somare in a ruling last month, but the country's parliament has supported O'Neill, who also has the support of the police and military.

After the court hearing, Sasa said he did not regret his actions, but said he wanted the situation to calm down, the Australian Broadcasting Corporation (ABC) reported from the scene.

Sasa is to be held at the capital's Bomana prison, police said.

Mineral-rich Papua New Guinea has been plagued by political instability and widespread corruption since independence from Australia in 1975.

(Sydney Newsroom +612 6273 2730)