April 29 (Bloomberg) -- HSBC Holdings Plc, Europe's largest bank, will be forced to delay the biggest foreign acquisition in South Korea, undermining President Lee Myung Bak's pledge to reverse a three-year slump in overseas investment.

HSBC's $6.2 billion purchase of Lone Star Funds' controlling stake in Korea Exchange Bank has been stuck in legal limbo since September amid a criminal probe into Lone Star. South Korea's financial regulator today said the deal won't get approval by HSBC's April 30 deadline. The London-based bank has yet to respond to the regulator's comments.

The fate of the takeover may shape perceptions of hostility toward overseas investors that Lee, two months into the job, is seeking to dispel. Yet trying to influence the outcome may leave Lee, who calls himself ``the CEO of Korea Inc.,'' open to accusations of manipulating legal proceedings.

``This can be seen as the barometer for the Lee administration's commitment to attracting foreign investment,'' said Kim Sang Jo, a professor of international trade at Hansung University in Seoul. ``But it won't be easy for Lee to meddle with the ongoing legal procedures.''

HSBC and Lone Star have agreed to extend the deadline until the end of June, MoneyToday reported today, citing unidentified finance industry officials. The companies plan to announce the extension today, the Korean-language online newspaper said.

Jina Hwang, a Seoul-based spokeswoman at HSBC, declined to comment, as did Michael Breen, whose agency represents Lone Star in Seoul.

Five-Year Sentence

``We do not have sufficient basis to close the case by tomorrow,'' Financial Services Commission Chairman Jun Kwang Woo told reporters today in Seoul. ``It takes time.''

Lone Star's two-year effort to sell Korea Exchange, the nation's sixth-largest bank, has been interrupted by a probe into the circumstances of its purchase in 2003. Lone Star scrapped a sale of its Korea Exchange stake to Kookmin Bank in November 2006 because of the legal dispute.

Paul Yoo, head of Lone Star's Korean unit, was jailed on Feb. 1 for five years for allegedly manipulating the stock price of the bank's credit card arm to acquire it cheaply. Yoo has appealed the sentence. Lone Star founder John Grayken, who testified on behalf of Yoo, hasn't been charged with wrongdoing.

Sixty-two percent of 37 Seoul-based chief executive officers of U.S. and European companies said it would be more difficult to increase investment locally because of the Lone Star verdict, according to a survey published in March by the Institute of Global Management.

`I am the CEO'

Anthony Michell, the Seoul-based president of Euro-Asian Business Consultancy, said the Lone Star controversy will mean a loss of investment for South Korea.

``If the sale of KEB was quickly approved, it would encourage other foreign investors to come,'' said Michell, whose firm advises companies on investing in Korea.

Foreign investment fell for a third straight year in 2007, according to the Ministry of Knowledge Economy. Berlin-based Transparency International ranked South Korea 43rd last year as a place for business in terms of the level of corruption, below Asian exporters such as Japan, Hong Kong and Taiwan.

Lee's administration aims to double annual foreign direct investment to $20 billion by 2012. The 66-year-old president is South Korea's first from a corporate background, having served as CEO of Hyundai Engineering & Construction Co., the country's largest builder by market value.

``I am the CEO of the Korea Inc.,'' Lee told investors in New York on April 16 during a five-day trip to the U.S. ``I truly hope you will come on board by investing in Korea.''

Softer Stance

While Lee won't be able to affect the Lone Star probe, ``it would be extremely difficult and undesirable to void'' the Korea Exchange deal, said Yun Chang Hyun, a professor of business administration at University of Seoul.

``It would be better for HSBC to extend the deal by another few months and monitor how the new government acts,'' said Yun.

Recent comments from South Korea's financial regulator signal authorities are worried about potential fallout should the deal collapse. Jun, who was appointed chairman of the Financial Services Commission after Lee came to power on Feb. 25, said last week the issue was raised during the president's U.S. trip.

``Some Wall Street CEOs pointed out that whether the Lone Star issue is resolved favorably and swiftly will test the new government's commitment to attracting foreign investment,'' said Jun, who accompanied Lee on the trip, on April 23. ``We hope to seek ways that would ultimately bring a win-win situation to all parties.''

Chasing Kookmin

HSBC Chairman Stephen Green said in February that he was hopeful of completing the deal by the deadline. HSBC targeted Korea Exchange to become big enough to compete with local rivals such as Kookmin Bank, HSBC Finance Director Douglas Flint said last September, when the deal was announced.

The Seoul-based bank would give HSBC more than 7.4 million customers and 338 branches in Asia's fourth-largest economy. Kookmin Bank, the nation's largest, has 27 million clients and 1,212 branches.

``A quick and clear decision by the financial authorities is the best way to dispel foreign investors' mistrust in the Korean market,'' said Kim of Hansung University.

To contact the reporter on this story: Bomi Lim in Seoul at blim30@bloomberg.net

Last Updated: April 29, 2008 02:40 EDT