By Faith Hung

TAIPEI (Reuters) - Taiwan's top financial regulator resigned on Monday as a scandal over state-run institution Mega Financial's <2886.TW> New York bank branch breaching anti-money laundering regulations claimed its first victim among officials on the island.

Ding Kung-Wha, the chairman of the Financial Supervisory Commission (FSC), stepped down amid mounting criticism over the watchdog's effectiveness. The Mega Financial branch was fined $180 million by U.S. authorities for violations of rules including lax attention to risk exposure in Panama.

In a statement released by the FSC, Ding, 62, said he hoped his resignation would reduce damage to the FSC over the Mega Financial scandal. President Tsai Ing-wen has said the case had damaged Taiwan's reputation and created public mistrust about supervision of the financial sector.

But Tsai's opponents on the island said the official's departure was a symbolic political gesture that put disproportionate blame on Ding, who only assumed his position with the FSC in May of this year. A veteran of Taiwan's administration not widely known in international finance circles, Ding previously served as chief of the Taipei Exchange and as a finance ministry official.

"Ding submitted his written resignation this morning," cabinet spokesman Hsu Kuo-yung said at a news conference. Hsu said Ding's view was that he had done as much as he could in his role as chairman to assist the investigation and efforts to improve the FSC.

Ding's successor has yet to be selected, Hsu said.

One potential candidate to replace him, according to political sources in Taipei, is Shih Jun-ji, current chairman of the Taiwan Stock Exchange. Shih has previously served a brief stint as the FSC's chief.

An emergency task force set up by President Tsai is now supervising a probe into the violations of U.S. regulations. But opposition politicians said Ding was carrying responsibility just a few months after taking office for transactions that did not originate in Taiwan itself.

Ding and some legislators held a closed-door meeting last week on details of 174 suspicious transactions belonging to 76 accounts processed in Mega's New York branch. None of the transactions were from Taiwan, according to Lai Shyh-bao, a prominent member of opposition party Kuomintang (KMT), and other people with direct knowledge of the matter.

"He (Ding) did not have to take responsibility," said Lai. "Some supporters of President Tsai thought he is too bureaucratic. He has financial expertise, but is not skilled in politics."

In addition to the Mega Financial scandal, the FSC has faced criticism over its handling of a case involving XPEC Entertainment, a Taiwanese gaming software developer. Investors in XPEC have suffered heavy losses after a tender offer for of a stake in the company by a Japanese suitor went sour, domestic media have reported, with some complaining the FSC should have taken regulatory action over the way the offer was managed.

(Reporting by Faith Hung; Additional reporting by Jeanny Kao and Emily Chan; Editing by Kenneth Maxwell)