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UPDATE 3-Deutsche Boerse pays $12.5 in bid to end insider trading case

* Deutsche Boerse to pay fine for allowing CEO to buy shares

* CEO is subject to insider trading investigation

* Frankfurt prosecutors had offered deal to settle case

* Deutsche Boerse may extend share buyback programme (Updates with Frankfurt prosecutor, German financial regulator, shareholder representative, share price)

BERLIN/FRANKFURT, Sept 14 (Reuters) - Deutsche Boerse has agreed to pay fines totalling $12.5 million in a bid to draw a line under allegations of insider trading over share purchases by its chief executive Carsten Kengeter.

But the exchange operator left a question mark hanging over its leadership, saying it would wait until investigations by Germany's finance watchdog and the government of Hesse are completed before deciding whether to extend Kengeter's contract.

Kengeter, who denies any wrongdoing and is cooperating with authorities, made share purchases shortly before formal merger talks with London Stock Exchange were announced and triggered a sharp rise in Deutsche Boerse's shares.

The insider trading investigation has cast a shadow over the German exchange operator's efforts to recover from the failed merger with LSE, drawn criticism from shareholders and made the board reluctant to extend the CEO's contract.

In July, the German exchange operator said that the Frankfurt prosecutor had offered a deal to settle the case for fines totalling 10.5 million euros ($12.5 million).

Deutsche Boerse said it had now decided to accept the fines, but maintained that the allegations were unfounded.

"By doing so, Deutsche Boerse aims to ensure that the company can re-focus as quickly as possible on managing the business and leave behind the serious burdens placed on it by the investigation proceedings," it said in a statement.

"Deutsche Boerse, however, does not share the Public Prosecutor's view concerning the accusations raised," it said, adding it assumed the proceedings against Kengeter would be closed subject to conditions.

REPUTATIONAL RISK

Some shareholders were unhappy at the settlement.

"The damage to Deutsche Boerse's reputation is already immense. Shareholders should not be asked to shoulder more costs now. This approach is not acceptable," fund manager Ingo Speich of Union Investment, said.

The Frankfurt prosecutor declined to comment on Thursday on the case against Kengeter, who last week said the stock purchases were a "moral duty", or how long its investigation would take to conclude.

Meanwhile, German financial regulator BaFin said: "As previously announced, we will conduct an evaluation of whether Kengeter is still a 'fit and proper' manager once the criminal proceedings have been completed."

Deutsche Boerse is paying fines for two separate failings.

Part is for failing to notify the public promptly about the merger talks with the LSE, with the remainder for the design of the executive share-buying scheme that allowed Kengeter to buy shares in Deutsche Boerse in the first place.

Kengeter and Deutsche Boerse have said that he was authorised to buy the shares at a fixed time, between Dec. 1 and Dec. 21, 2015, as part of the compensation programme - some two months before the merger talks were made official.

Kengeter also received additional virtual shares, whose value depended on the long-term development of the bourse's value, and is required to hold the stake until the end of 2019.

Deutsche Boerse also said it may extend a 200 million euro share buyback programme to the end of June 2018 from the end of 2017, citing market conditions.

Its shares eased by 0.4 percent to 93.88 euros by 0825 GMT, broadly in line with Germany's blue-chip index. ($1 = 0.8415 euros) (Additional reporting by Hans Seidenstuecker, Andreas Framke and Maria Sheahan; Editing by Alexander Smith)