UPDATE 1-Wal-Mart should face lawsuit over alleged Mexico bribery -U.S. judge

(Adds allegations, other probes, case citation, byline)

May 9 (Reuters) - Wal-Mart Stores Inc should face a U.S. lawsuit accusing it of defrauding shareholders by concealing suspected corruption at its Mexico operations, even after learning that a damaging media report detailing alleged bribery was being prepared, a federal judge said.

U.S. Magistrate Judge Erin Setser in Fayetteville, Arkansas on Thursday recommended denying Wal-Mart's request to dismiss the lawsuit led by a Michigan-based pension fund against the world's largest retailer and former Chief Executive Mike Duke.

A Wal-Mart spokesman said the company disagrees with Setser's recommendation, which is subject to review by U.S. District Judge Susan Hickey. District judges are not bound by magistrate judges' recommendations but often follow them.

Wal-Mart's share price, which is not known as particularly volatile, fell 8.2 percent in the three days after The New York Times reported on its investigation into the alleged bribery on April 22, 2012. That decline wiped out roughly $17 billion of market value. The Times' coverage later won a Pulitzer Prize.

Plaintiffs, led by the City of Pontiac General Employees' Retirement System, alleged that Duke and other Wal-Mart officials knew as early 2005 that the retailer's Walmart de Mexico unit might have been bribing local officials to open stores faster, but did not probe the matter adequately in 2005 and 2006.

They said Wal-Mart should have "come clean" in a quarterly report filed on Dec. 8, 2011, soon after it had learned of the Times' investigation.

Instead, they said the report, known as a 10-Q, was a "phony demonstration of vigilance and virtue" that made it appear that Wal-Mart learned of suspected corruption in 2011, addressed it appropriately, and reported its findings to the U.S. Department of Justice and Securities and Exchange Commission.

Setser said reasonable investors would have viewed the 2005 and 2006 events as significant in light of subsequent events.

They included an Oct. 15, 2005 email to Duke, who then led Wal-Mart's international operations, from Wal-Mart's general counsel summarizing the alleged corruption.

"Plaintiff has sufficiently alleged that defendants knew the omission in the December 2011 Form 10-Q of the 2005 revelation of the suspected corruption and defendants' 2005 and 2006 investigation was materially misleading," Setser wrote.

Wal-Mart faces probes by U.S. and Mexican investigators into the alleged bribery, including whether the Bentonville, Arkansas-based company violated the U.S. Foreign Corrupt Practices Act. The U.S. Congress also investigated the matter.

Randy Hargrove, a Wal-Mart spokesman, said: "We respectfully disagree with the magistrate judge's opinion, and continue to believe that the complaint does not meet the standard necessary to move the case forward."

Jason Forge, a Robbins Geller Rudman & Dowd partner who represents the lead plaintiff, did not immediately respond to requests for comment. The lawsuit seeks class-action status for the Dec. 8, 2011 to Apr. 20, 2012 time period.

The case is City of Pontiac General Employees' Retirement System v. Walmart Stores Inc et al, U.S. District Court, Western District of Arkansas, No. 12-05162.

(Reporting by Jonathan Stempel in New York; Editing by Nick Zieminski)