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TOKYO, June 5 (Reuters) Star Japanese fund manager Yoshiaki Murakami was arrested on Monday on suspicion of insider trading, media reported, the latest fall-out from a scandal surrounding once high-flying Internet firm Livedoor.

Murakami, known for squeezing corporate value out of the firms that he targets, admitted to the charges in a nationally televised news conference earlier in the day, and said he would resign immediately from his $3.6 billion investment fund.

But in an emotionally charged appeal, the former trade bureaucrat said he was proud of his achievements and lashed out at Japan Inc. as hostile to those who challenged the system.

''This time I got a red card. I am going to leave the pitch once and reflect,'' he told more than a hundred reporters who packed a small room at the Tokyo Stock Exchange.

''I hope Japan will one day become a country that accepts people who challenge the status quo.'' Murakami, 47, and 33-year-old Livedoor CEO Takafumi Horie had become symbols of the more free-wheeling style of capitalism that is gradually taking hold in Japan.

Both had been praised for challenging entrenched corporate customs that put shareholder value behind protecting management and employees. But they also came under fire for their aggressive and undisguised pursuit of profits.

TV networks broadcast the Murakami news conference live as news helicopters circled over head, trailing Murakami to and from the stock exchange.

Murakami said he was surprised when prosecutors accused him of trading on advance knowledge of a high-profile takeover bid launched by Livedoor boss Horie last year, but concluded after reviewing his actions that they could be interpreted as breaking securities laws.

''Rather than spend two years fighting about it in court, I decided the best thing would be to agree with the prosecutors,'' he said. ''I consider myself a pro among pros in this securities market. I had to consider the outside possibility that I had made a mistake.'' Murakami faces up to three years in prison or a fine of up to 3 million yen ($26,890).

Horie and other executives were arrested in January and have been charged with breaking securities laws in a separate business deal.

Horie has denied wrongdoing.

Murakami said Horie and another Livedoor executive told him in late 2004 that they hoped to launch a takeover bid for Nippon Broadcasting System Inc. (NBS), a radio broadcaster affiliated with Japan's largest private media group in which Murakami's fund owned shares.

Shares in NBS surged after Livedoor launched its bid last February. The fund, which accumulated more shares in the months before the bid, sold its stake at a profit to Livedoor and to market investors.

''I didn't think Livedoor had the wherewithal to actually go through with it,'' Murakami said of his initial conversation with the Livedoor executives. ''I didn't buy the (NBS) shares because of it, but it's true that I heard what I heard.'' Livedoor ultimately withdrew its bid for NBS after a bitter fight that rocked corporate Japan.

It settled for a compromise deal that gave control to Fuji Television Network Inc., an NBS affiliate that was fighting Livedoor for control of the radio firm.

Murakami acknowledged that he continued to discuss business matters including NBS with Horie on a casual basis.

''We saw each other at the gym, so of course we chatted.'' ''PRO AMONG PROS'' Murakami stressed that at the time he had no intention of breaking the law. Despite his defiant tone, he said he would not return to the world of securities trading.

His fund, around 60 percent of whose investors are U.S.

universities, had since its inception doubled in size to be worth around 400 billion yen ($3.6 billion), he said.

Formally known as MAC Asset Management and now headquartered in Singapore, the fund will continue to operate despite his resignation, he said, although it may shrink as some investors leave.

Only about a third of the fund's money has been invested, with the rest sitting on its books as cash, he said.

In an abrupt turn, Murakami said the fund will cooperate with Hankyu Holdings Inc.'s $3.5 billion bid for fellow railway operator Hanshin Electric Railway Co.

The fund owns about 47 percent of Hanshin and a sale of shares would give the fund about 180 billion yen.

It also has sizeable stakes in many Japanese companies including microphone parts maker Hosiden Corp. and Sumitomo Warehouse Co. Ltd.

Shares in those two companies climbed on Monday after sliding on Friday when news of the investigation by prosecutors surfaced.

($1=111.56 Yen) REUTERS PV ND1546