June 10 (Reuters) - The top U.S. derivatives regulator on Wednesday released new draft regulations governing the burgeoning prediction markets industry, seeking to cement federal oversight over companies that have shot to the forefront of politics and sports betting while presenting new possible avenues for fraud.

In proposing new regulations, the U.S. Commodity Futures Trading Commission aimed to address far-reaching questions about prediction markets' appropriate functions, their risks and the best means of policing their users' conduct.

CFTC Chair Michael Selig said in a statement that the proposed new regulations offered a means of protecting market integrity "without standing in the way of responsible innovation."

The CFTC's proposed new regulations arrive as the agency faces strong opposition from an array of U.S. states and Native American tribes who say event contracts predicated on sports amount to illegal gambling and have sued to block them.

In addition to Kalshi and Polymarket, sports betting and crypto firms, several of them with ties to President Donald Trump's family and businesses, have hurried to join the new industry, which allows users to put yes-no wagers on the outcome of virtually any event and has attracted billions of dollars from punters around the world.

In calling for comment in March ahead of the proposal, the CFTC asked the public to weigh in on what sorts of event contracts are in the public interest and whether the agency ought to prohibit wagering on criminal activity and various forms of violence.

Instances of alleged insider trading have multiplied in recent months, although the prediction market companies have maintained that they themselves detected and reported them: a U.S. Special Forces soldier who wagered on the capture of Venezuelan leader Nicolas Maduro, apparent bets by disgraced former lawmaker George Santos on his attendance at Trump's State of the Union address and an Italian Google software engineer accused of trading on insider knowledge, to name a few.

NPR reported last month that some political campaign staffers said people in their industry commonly used prediction markets to bet on their own races. Experts tell Reuters that policing this growing pool of insiders may prove a major challenge.

The proposal will be subject to a 45-day notice-and-comment period prior to any decision on finalization.