* A new investor may sink ex-CEO's campaign for reinstatement

* Southeastern says Olympus need not rush for capital

* Southeastern says share issue could boost legal liabilities (Adds detail, background)

By Nathan Layne and Sinead Cruise

TOKYO/LONDON, Dec 19 (Reuters) - A big foreign investor in Japan's disgraced Olympus Corp voiced its concern on Monday that the firm would bring in a major new investor, in a move that could effectively sink former CEO Michael Woodford's campaign to be reinstated.

Tennessee-based Southeastern Asset Management, which holds 5 percent of the maker of cameras and medical equipment, said it was worried the current board may issue new shares with the aim of diluting existing shareholders and retaining power.

Southeastern and Chicago-based Harris Associates, which owns about 4 percent of Olympus, have been two of the most vocal critics of directors for dismissing Woodford in October after he questioned accounting irregularities at the firm.

Olympus has since admitted to a $1.7 billion accounting fraud to cover up securities losses dating back to the 1990s but says it was orchestrated by a handful of executives, and the board members not implicated remain in place.

Southeastern said a move to bring in a friendly shareholder would be seen as a last-ditch attempt by those directors to hold on to power and would further damage the image of corporate Japan.

"If the incumbent board is allowed to sell off the company's independence cheaply to protect its own interests, it will deal a severe blow to the reputation of Japan's capital markets and corporate governance," Southeastern said in a statement.

Olympus President Shuichi Takayama said at a briefing on Thursday that he would consider capital and operational tie-ups with other companies as it maps out a revival plan to be put to an extraordinary shareholders' meeting in March or April.

Takayama also said that directors that were found not to be responsible for the accounting fraud may not need to resign, in an apparent reversal from a previous statement suggesting the entire board would be replaced.

His statements triggered speculation Olympus may look to issue shares to another company. Panasonic Corp, Canon Inc and Sony Corp have been mentioned by bankers and analysts as among possible suitors, though no company has publicly declared concrete interest in a deal.

Under Tokyo listing guidelines, Olympus can issue new shares equivalent to up to 25 percent of those outstanding without shareholder approval. At the current stock price, an issue of that size would raise 63 billion yen ($810 million).

Southeastern said Olympus was not in desperate need of capital given its healthy cash flow from endoscopes and more than $2 billion in cash -- and warned that a share issue could leave it vulnerable to more shareholder lawsuits.

It also urged that Woodford be brought back to play some role in improving the discredited corporate governance at Olympus.

"We are concerned that they want the capital-raise not to shore up the balance sheet but to bring in a partner who would be supportive of their continued control of the board," Josh Shores, a senior analyst and principal at Southeastern, told Reuters ahead of the statement.

"You could solve this in the same way we have been pushing for the whole time, an open and collaborative way. Bring back Woodford to be involved with the required changes in corporate governance and the legal liabilities could fall to the lower-end of the range," Shores said.

APPARENT SPLIT

Woodford is lobbying shareholders to return to the helm, but his campaign has caused an apparent split between major foreign shareholders, who have called for his reinstatement, and major Japanese investors who have lent him no public support at all.

Takayama said the existing board would present its new revival plan, including its suggested slate of directors, to a third-party committee charged with judging its suitability before it is put to shareholders. He said he did not plan to consult with Woodford on the plan.

Olympus' next CEO and board face major challenges, starting with a need to repair its balance sheet, which was revealed last week to be $1.1 billion weaker than had been previously disclosed in its fraudulent accounts.

Financial restatements knocked Olympus' shareholder equity ratio down to just 4.5 percent as of the end of September, or roughly a quarter of what is considered healthy. It is also sitting on a relatively high level of debt at 665 billion yen.

Supported by profits from the endoscope business, Olympus has told its creditors that it could run the debt down to 409 billion yen by March 2015 without any fresh funding, though its cash pile would dwindle to 19 billion yen.

Olympus shares have more than doubled since hitting a post-scandal low of 424 yen on Nov. 11, but are still down some 60 percent of their value before Woodford was sacked on Oct. 14

The share price closed Monday down 8.9 percent at 915 yen ($1 = 77.7100 Japanese yen) (Additional reporting by Linda Sieg; Editing by Edwina Gibbs and Joseph Radford)