*

Accused of market manipulation, Jane Street says its

trades were

basic arbitrage

*

Trading ban could be lifted sometime this week, source

says

*

Jane Street does not plan to resume options trading until

dispute resolved, source says

(Adds potential timeline for resumption of trading, bourse

monitoring and stock market reaction in paragraphs 6-9, 13)

By Jayshree P Upadhyay

MUMBAI, July 14 (Reuters) - U.S. high-frequency trading

giant Jane Street, which has been accused of market manipulation

by Indian authorities, has deposited $567 million in an escrow

account so that it can resume trading in the country.

The Securities and Exchange Board of India (SEBI) barred the

firm this month from buying and selling securities in the Indian

market and put a freeze on $567 million of its funds. Jane

Street was only to be allowed to resume trading if an equivalent

amount was deposited in an account that gives the regulator

rights over the money until its investigation is complete.

SEBI said in a statement on Monday that the money had been

transferred and it was examining the company's request that

restrictions placed on it be lifted.

"The money has been deposited in good faith. The firm

continues to contest the order and will send a formal response

rebutting the allegations in coming weeks," said a source with

direct knowledge of the matter.

Jane Street did not immediately respond to a Reuters request

for comment. It has told its staff it plans to contest SEBI's

allegations and that the practices in question were "basic index

arbitrage trading".

Even with the ban lifted, the tussle with SEBI is expected

to have a huge impact on its business in India, which is the

world's biggest derivatives market.

According to a separate source with direct knowledge of the

matter, Jane Street does not intend to trade in Indian options

while the dispute is unresolved.

Options have been Jane Street's main line of business in

India with its exposure to equity derivatives here roughly five

to seven times its exposure to regular stocks, said the first

source.

SEBI could send instructions to India's exchanges to lift

the ban sometime this week, said a third source, adding that the

bourses will be directed to monitor Jane Street's trades very

closely.

The sources were not authorised to speak to media and

declined to be identified.

SEBI has alleged that Jane Street bought large

quantities of constituents in India's Bank Nifty>

index in the cash and futures markets to artificially support

the index in morning trade, while simultaneously building large

short positions in index options which were exercised or allowed

to expire later in the day.

The regulator, which tracked Jane Street's trading patterns

for more than two years, has also widened its investigation to

include other indexes and exchanges, a source has previously

said.

Bourse operator BSE gained 3.2% on Monday on the

view that a lifting of the ban could bring more liquidity into

the market.

Explosive growth in Indian derivatives trading over the past

three years has prompted much consternation among authorities

about the fallout for retail investors.

The South Asian country accounted for roughly 60% of the

world's equity derivative trading volume in May, and in the past

financial year equity derivative losses for India's retail

traders widened by 41% to 1.06 trillion rupees ($12.3 billion).

($1 = 85.9640 Indian rupees)