SEOUL (Reuters) -Korea Zinc said on Wednesday it has decided to withdraw its plan to issue new shares worth $1.8 billion after the proposal sparked an investigation by the financial watchdog and a sell-off in the company's stock.

The world's biggest zinc refiner is now bracing for a major showdown with Young Poong and private equity firm MBK Partners at a shareholder meeting in an escalating takeover battle between the two founding family members of Korea Zinc.

"We have decided to humbly accept concerns from the market and shareholders," Korea Zinc said in a statement.

"Our company will win at a shareholder meeting by putting forward the company's long-term ... vision."

The share sale withdrawal marks a setback for Korea Zinc Chairman Yun B. Choi, who was seen backing the issue plan to ward off a takeover attempt by Young Poong and MBK, who have increased their stake to nearly 40% after a tender offer, versus about 35% stake held by Choi and his friendly groups.

Korea Zinc said in a regulatory filing it has decided not to pursue the share issue in view of concerns among investors and regulatory scrutiny.

Korea Zinc shares initially rose 6% after the withdrawal of the plan, but fell 7% in afternoon trade.

On Oct. 30, Korea Zinc announced a plan to issue new shares equivalent to nearly 20% of its total shares just two days after it bought back stock at a higher price.

South Korea's financial market watchdog launched an investigation into whether Korea Zinc's decision to issue new shares involved any unfair practice. The Financial Supervisory Service (FSS) also put brakes on the plan by ordering the company to revise its stock exchange filing on the share issuance.

"As the biggest shareholders of Korea Zinc, it is regrettable that Korea Zinc belatedly withdrew the plan only after causing major confusion in the capital market, and inflicting damage on existing shareholders," MBK Partners and Young Poong said in a joint statement.

BOARD BATTLE

Young Poong and MBK Partners asked a court to allow Korea Zinc to hold a special shareholder meeting, which is expected to take place early next year.

They nominated 14 new directors for the firm, which currently has 13 board members, to represent more than half the board.

Choi is also expected to nominate new independent directors to woo investors including the National Pension Service, which holds a more than 5% stake in the company, said Park Ju-gun, head of corporate analysis firm Leaders Index.

Korea Zinc said it will "actively push for" plans to enhance the independence of the board and improve governance, without elaborating.

Choi, a grandson of the company's co-founder and a Columbia law school graduate, will hold a news conference later in the day.