* Polymarket, Kalshi face scrutiny for bets on Khamenei

ouster

* US lawmaker threatens to ban prediction markets over

ethics concerns

* Prediction markets grow in popularity

(Adds White House spokesman comment in paragraph 6)

By Tom Westbrook

SINGAPORE/NEW YORK, March 2 (Reuters) - Bets that were

placed on the ouster of Iran's Supreme Leader Ayatollah Ali

Khamenei drew scrutiny on Monday of prediction markets such as

Polymarket and Kalshi, sparking calls from Democratic U.S.

lawmakers to outlaw wagers on military actions that could enrich

officials with inside knowledge.

Khamenei was killed in Israeli air strikes on Iran's capital

Tehran over the weekend. U.S. lawmakers and analysts flagged

bets that had been placed on his ouster both in January and

right before the attacks, stoking long-simmering concerns over

the legality and ethics of such trades, and the potential for

insider trading.

According to a Reuters review of Polymarket's website, $529

million was laid on a series of contracts tied to the timing of

attacks, and $150 million was bet on contracts on the removal of

Khamenei as Supreme Leader.

Analytics firm Bubblemaps said on X that six accounts made a

$1.2 million profit from Polymarket bets funded in the hours

before Saturday's raids. Rival Kalshi also ran a market on

"Khamenei out."

"It's insane this is legal," Democratic Senator Chris Murphy

said on X on Sunday in response to Bubblemaps' post, adding

-without providing evidence - that people around President

Donald Trump were profiting from the conflict. "I'm introducing

legislation ASAP to ban this."

"The only special interest guiding the Trump

administration's decision-making is the best interest of the

American people," Davis Ingle, a White House spokesman, said in

an email.

California Representative Mike Levin, a Democrat, also took

to X on Saturday to flag a Polymarket bet placed shortly before

the Iran strikes.

"Prediction markets cannot be a vehicle for profiting off

advance knowledge of military action. We need answers,

transparency, and oversight," he wrote.

Democratic senators on February 23 had also raised concerns

that prediction markets breached U.S. rules, and created

incentives to foment conflict and disclose classified

information, after a mystery trader made a roughly $410,000

profit betting on the ouster of Venezuelan President Nicolas

Maduro.

Polymarket did not immediately respond to a request for

comment but has argued that prediction markets harness the

wisdom of crowds to create accurate, unbiased forecasts.

Kalshi said it does not allow wagers directly tied to death.

CEO Tarek Mansour said the company did not profit on the

Khamenei market, after refunding fees to users. Kalshi is a

regulated platform and says it bans insiders.

LEGAL QUESTIONS

Prediction markets have exploded in popularity since the

2024 U.S. election, when their real-time probabilities proved

more accurate than polling in forecasting Donald Trump's

victory.

They offer tradable yes-or-no contracts that allow users to

bet on a wide range of real-world events from sports to politics

and the economy. Bet costs fluctuate between zero and 100 cents,

and typically pay out when an outcome is confirmed.

U.S. law prohibits wagers contrary to the public interest,

which may involve or relate to war or assassination. Trading on

nonpublic information may be illegal, depending on the market,

the nature of the information and who is trading it.

The platforms have grown in a regulatory grey area. The

Commodity Futures Trading Commission, which oversees the

majority of listed derivatives trading, lost a battle in court

to ban their bets on the outcome of U.S. elections.

The CFTC has since said it believes prediction markets are

within its purview and plans to create a federal framework to

oversee them.

A CFTC spokesperson did not respond to a request for comment

on Monday.

Last year, prediction markets enjoyed $47 billion in global

trading volume, according to analysts at brokerage Clear Street,

drawing attention from traditional Wall Street firms keen to get

a slice of the action.

New York Stock Exchange parent ICE has taken a $2

billion stake in Polymarket, while trading platform Plus500

last month launched prediction markets on its U.S.

retail interface through a partnership with Kalshi.

(Reporting by Tom Westbrook and Gregor Stuart Hunter in

Singapore; Additional reporting by Chris Prentice in New York;

Editing by Michelle Price, David Gregorio and Muralikumar

Anantharaman)