UPDATE 1-S.Korea to begin industry-wide probe after Samsung Securities error

* Samsung Securities wrongly issued 2.8 billion shares

* Company issued shares instead of dividends worth 2.8 bln won

* Some company employees sold off shares they were given in error

* S.Korea finance minister calls for tough penalties

* Error knocked off $216 mln from the co’s mkt value over two days (Adds quote from financial watchdog, background)

SEOUL, April 9 (Reuters) - South Korea’s financial watchdog on Monday said it would begin a probe into the “overall stock markets system”, after employees of Samsung Securities Co Ltd sold off stocks that were mistakenly given to them last week.

Samsung Securities, one of South Korea’s biggest brokerages, wrongly issued 2.8 billion shares, when it was supposed to pay dividends worth 2.8 billion won to employees under a stock ownership plan.

Shares of the company went into a tailspin on Friday, plunging almost 12 percent at one point, after some of the employees unloaded the shares given to them in error.

Describing the sell-off as a “huge financial accident”, South Korea’s Financial Supervisory Service (FSS) said the incident had hurt the stability and credibility of the country’s financial system while causing damages to investors.

“And therefore there will be a strict probe into the overall stock markets system,” FSS said in a statement.

Samsung Securities has faced a lot of criticism for wrongly issuing the shares, which would be worth about 104 trillion won ($97 billion) at Monday’s close of 37,200 won.

The company’s shares have shed almost 7 percent over two days, knocking off $216 million from the company’s market value.

The brokerage, which currently has a market capitalisation of $3.1 billion, has posted an apology on its website.

Separately, more than a 100,000 people have signed and submitted a petition on the website for the presidential Blue House, demanding severe punishment for employees found guilty.

Earlier in the day, South Korea’s finance minister told reporters that Samsung Securities employees who had sold stocks that were mistakenly given to them could face tough penalties.

“We really have to look into this seriously as it is not understandable nor tolerable at all that these people sold off shares that were mistakenly given,” Kim Dong-yeon said.

“If there were problems regarding the workers’ moral hazard, I feel they should be firmly punished.” ($1 = 1,070.2400 won) (Reporting by Shin-hyung Lee and Dahee Kim; Editing by Himani Sarkar)