By Michael Hirtzer and Tom Polansek

CHICAGO (Reuters) - A U.S. judge sentenced futures trader Michael Coscia to three years in prison on Wednesday, a lighter punishment than prosecutors had sought for the first person criminally convicted of the manipulative trading practice of spoofing.

Coscia also was sentenced to two years of supervised release from jail, in a case that was closely watched by traders who want to avoid similar charges and market regulators.

Spoofing involves placing bids to buy or offers to sell futures contracts with the intent to cancel them before execution. By creating an illusion of demand, spoofers can influence prices to benefit their market positions.

Prosecutors had asked U.S. Judge Harry Leinenweber to lock up Coscia, owner of New Jersey-based Panther Energy Trading, for as long as seven years and three months after he was convicted last year of spoofing and commodities fraud.

Leinenweber told a packed courtroom in Chicago that Coscia's typical earnings of about $150,000 per month tripled while he was spoofing markets in 2011.

"It's hard to see why he was doing that other than greed," the judge said.

Coscia, who had denied wrongdoing during his trial, said in short prepared remarks at the sentencing: "I stand here convicted and shamed because of my actions."

Stephen Senderowitz, one of Coscia's attorneys, said he would appeal the conviction, partly because the government did not sufficiently show that other traders lost money as a result Coscia's actions.

The trader embraced more than a dozen family members and friends after the sentencing. He must report to prison by Sept. 30.

Prosecutors and regulators hope Coscia's prison term will discourage other traders from trying to spoof markets. His prosecution was the first under an anti-spoofing provision of the 2010 Dodd-Frank financial reform.

Coscia was accused of using computer algorithms to quickly place large orders that he never intended to execute into markets run by CME Group <CME.O> and Intercontinental Exchange <ICE.N>.

"Initially, there was skepticism that the government could pull this off. I don't think that skepticism is around anymore," said Renato Mariotti, a former assistant U.S. attorney who prosecuted Coscia last year.

Mariotti, now a partner at the law firm Thompson Coburn, added that more spoofing indictments were likely soon.

Last year, the U.S. Justice Department and U.S. Commodity Futures Trading Commission also brought criminal and civil spoofing charges against Navinder Sarao, a London-based trader accused of market manipulation that contributed to the May 2010 "flash crash" in which the Dow Jones Industrial Average briefly plunged more than 1,000 points. Sarao has denied the allegations.

Coscia's case is U.S. v. Coscia, 14-cr-00551, U.S. District Court, Northern District of Illinois.

(Reporting by Michael Hirtzer and Tom Polansek; Editing by Richard Chang)