Lawyers are warning recent raids on the Korean offices of US investment fund Lone Star by the country's prosecutors could have a chilling effect on international investments in the country.

Over 70 boxes of documents were seized from Lone Star offices by Korean authorities and an arrest warrant was issued for former head of the office Steven Lee, wanted on suspicion of tax evasion and embezzlement.

Authorities have also banned about 10 officials connected with Lone Star from leaving the country.

The fund is under scrutiny over its purchase of a majority stake in Korea Exchange Bank (KEB) in 2003, tax irregularities and alleged illegal money transfers

The moves come on the back of a rising nationalistic furore in Korea over international funds that have bought investments cheaply before selling out for large profits.

A tax probe was launched against a number of private equity firms late last year, with Lone Star being hit with a hefty tax bill of around US$215m as a result.

Other international investment firms investigated were Carlyle, Goldman Sachs, Westbrook and AIG.

Paul Hastings' corporate partner Jong Han Kim said the current situation with Lone Star will dampen enthusiasm for private equity investment in Korea.

"The situation makes it seem that if you are a foreign fund it might be wise to pull out of Korea until the situation becomes more favourable," Kim said.

The investigations come as Lone Star seeks to offload its stake in KEB to Korea's Kookmin Bank for over US$6bn, which would see the fund reap the largest capital gain yet made by a foreign private equity fund in Korea.