Saturday's arrest at gunpoint of oil magnate Mikhail Khodorkovsky risks undoing Putin's efforts during three years in power to drag up the sagging economy and create a strong political system into which investors would happily pour money.

Khodorkovsky, 40, head of oil giant YUKOS, was snatched from a plane in Siberia, charged with fraud and tax evasion and put in a Moscow jail pending further investigation.

"The arrest, indictment and imprisonment of Mikhail Khodorkovsky...is a disgraceful setback in Russia's post-Soviet development," United Financial Group brokerage said.

"Everyone is a loser...including President Putin himself."

Putin, in his first public comment on an affair that has triggered uproar in the political and business community, appealed for calm and refused to negotiate over the arrest.

"There will be no meetings and no bargaining over the activities of the law enforcement agencies as long as, of course, these agencies are acting within the framework of Russian law," he told members of government, saying the issue was entirely in the hands of the courts.

Russian shares fell more than 10 percent on the arrest. Those of YUKOS lost a fifth of their value.

The rouble dropped as banks rushed for U.S. currency on fears that the arrest would send money flooding out of Russia.

How long the damage lasts depends on "how successfully Putin extricates himself from the dangerous political trap which he has carelessly fallen into," United Financial Group said.

PUTIN WARNS AGAINST HYSTERIA

Putin called for an end to "speculation and hysteria" over any roll-back of the privatisation of the early 1990s which put much of the old Soviet state wealth into the hands of a few businessmen, or "oligarchs" as they came to be known.

Those privatisations helped propel Khodorkovsky to a fortune recently estimated by Forbes at $8 billion, making him the 26th richest man on the planet.

While the arrest has infuriated investors and Russia's liberals, it may even raise Putin's standing among the bulk of the electorate which views oligarchs largely as robbers of state assets who left them worse off than under the Soviet system.

"I am a pensioner, so by default I can't be on Khodorkovsky's side. He...is a thief," said Zoya Andreyevna, in her early 70s. "I trust Putin. His eyes are so kind. He is a kind man, he understands us pensioners."

The issue has been bubbling near the political surface since the summer when a Khodorkovsky associate was arrested in what many saw as a warning shot by the Kremlin to tell the tycoon to keep his nose out of politics.

Khodorkovsky backs two minor political parties but many analysts believe he has higher ambitions which are seen as a threat by some in the Kremlin establishment.

His arrest is at an especially sensitive time with parliamentary elections in early December and Putin's almost certain attempt at reelection next March.

"It's clear that a political show trial is being prepared," Gleb Pavlovsky, a political image-maker credited with helping Putin's rise to power, told Izvestia. "This is a Stalin phenomenon."

The jailing of the high-profile businessman has come just as Russia has begun to rise in the eyes of the international financial community. Earlier this month it was handed a crucial investment grade by one major ratings agency.

"If the upgrade re-emphasised Russia's much-improved financial situation, Khodorkovsky's arrest serves as an unwelcome reminder of Russia's high country risk and questionable legal system," Aton Capital brokerage said.

Khodorkovsky's lawyer, Anton Drel, told Reuters he had not been allowed to speak to his client who is in Moscow's Matrosskaya Tishina (Sailor's Rest) jail.

Deputy Justice Minister Yuri Kalinin said the oil tycoon had not been given any special privileges.

"Khodorkovsky is in a five-man cell. We have received no complaints or statements from him," Interfax quoted him as saying.

Khodorkovsky heads Russia's biggest oil company, YukosSibneft, created by a merger now under way of YUKOS with smaller rival Sibneft.

U.S. oil majors Exxon Mobil and Chevron Texaco are thought to be interested in purchasing a stake in it but market analysts said talks on that would almost certainly now have to wait.

(Additional reporting by Maria Golovnina, Larisa Sayenko, Andrius Vilkancas and Dmitry Zhdannikov)

See also:

YUKOS case

Reuters, October 27, 2003