By Joyce Lee and Lee Chang-ho

SEOUL (Reuters) - South Korea's Hotel Lotte Co Ltd said on Monday it was indefinitely postponing its IPO worth up to $4.5 billion, as the wider Lotte Group reeled from the impact of a series of raids on group firms by prosecutors.

The move is a blow to the company's ambitious expansion efforts, which include a push to make its duty free retail arm the world's largest. The duty free business, which accounts for most of Hotel Lotte's revenue, ranks third globally by sales.

Friday's raids on Lotte Group headquarters, Hotel Lotte and other Lotte companies were part of an investigation into a possible slush fund, three people with direct knowledge of the matter have said.

In addition to the derailment of an IPO billed as the world's biggest this year, the aftermath of the raids saw Lotte Chemical Corp <011170.KS>, the conglomerate's biggest listed unit, bow out of bidding for U.S.-based Axiall Corp <AXLL.N>. Share prices of group firms slid on Monday.

"This will freeze the group's investment decisions for the foreseeable future," said Chung Sun-sup, CEO of research firm Chaebul.com.

The IPO was intended in part to simplify the ownership structure and improve corporate governance at the Lotte Group, South Korea's fifth-largest family run conglomerate, or chaebol, after a highly public feud over succession among the founding Shin family drew wide public criticism.

Friday's raids were the largest in terms of manpower mobilized involving a single corporate group in South Korea, Chaebul.com's Chung said. Prosecution officials could not immediately be reached on Monday to confirm that.

About 200 prosecutors and investigators searched locations including Lotte Group headquarters and offices of affiliates, two prosecution sources have said.

Hotel Lotte, which had earmarked 1.7 trillion won ($1.45 billion) of its IPO proceeds to grow its duty free operations overseas, said it would continue to pursue expansion of its local duty free business and new overseas duty free locations despite the pulling of its listing plan.

South Korea is the world's largest duty free shopping destination, although the market is increasingly crowded.

15 HOURS

The raid at Lotte Group headquarters began on Friday morning and lasted about 15 hours before investigators hauled away dozens of plastic and cardboard boxes around midnight, according to Lotte Group. Local media showed photos with boxes labeled "chairman's room" in block letters.

South Korea's economy, Asia's fourth-largest, is dominated by the chaebol, and the country's stocks have long traded at discounts to those elsewhere given investor concerns over corporate governance and ownership structures.

"Legal risks have upset Lotte's listing plans. In the eyes of foreign investors, South Korea's corporate governance is a very uncertain issue," said Kim Sang-jo, a professor of economics at Hansung University.

Hotel Lotte said in a filing on Monday it made the decision to postpone the IPO to protect investors, given recent "internal and external issues".

The raids were the second setback this month for the deal.

Last Tuesday, Hotel Lotte cut the size of the IPO and pushed back the listing from June to July, after prosecutors launched a bribery investigation into a director.

Shares of Lotte group firms tumbled on Monday. Lotte Shopping <023530.KS> and Lotte Confectionery <004990.KS> fell 5.4 percent and 6 percent respectively, while Lotte Chemical Corp <011170.KS> closed 3.9 percent lower. The broader market <.KS11> dropped 1.9 percent.

($1 = 1,172.8600 won)

(Additional reporting by Se Young Lee; Editing by Edwina Gibbs, Tony Munroe and Alex Richardson)