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UPDATE 1-Knight Capital's Deephaven halts fund redemptions

* Deephaven unit halts redemptions in flagship fund

* Deephaven to work with investors seeking money back

* Extreme, unprecedented market conditions blamed

NEW YORK, Oct 30 (Reuters) - Knight Capital Group Inc NITE.O, the electronic trading services provider, said its Deephaven Capital Management LLC unit has suspended withdrawals from two hedge funds, including its flagship, after investors demanded much of their money back.

In a Thursday filing with the U.S. Securities and Exchange Commission, Knight said Deephaven halted redemptions from its $1.6 billion Global Multi-Strategy Fund and its $70 million International Volatility Strategies Fund.

Knight said the halts are intended to protect investors from “extreme and unprecedented market conditions,” tougher margin and financing requirements being imposed by prime brokers and other counterparties, and a surge in redemptions.

It said investors have sought to redeem 30 percent of the Global Multi-Strategy Fund’s assets, and 63 percent of the International Volatility Strategies Fund’s assets. Knight said the funds will work with investors on handling redemptions.

The larger of the two funds accounted for about 59 percent of Deephaven’s $2.7 billion of assets under management as of the beginning of October, Jersey City, New Jersey-based Knight said. That amount was down from $4.4 billion a year earlier.

Knight said it invested $48.4 million in the funds as of Sept. 30, and $63.3 million overall in Deephaven funds.

Many hedge funds and asset managers have struggled with redemptions since the global credit crisis mushroomed last month, as investors sought safety in cash and government bonds. This has resulted in forced sales of many assets, driving equity markets lower worldwide.

In January, Deephaven announced the liquidation of a $780 million fund that tried to profit from takeovers, after heavy redemption requests.

Knight shares were up 10 cents at $14.40 in morning trading on the Nasdaq. (Reporting by Jonathan Stempel; editing by John Wallace)

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