* Serious Fraud Office calls off Dahdaleh prosecution
* Trial collapse is serious setback for demoralised agency
* Case addressed alleged high-profile corruption in Bahrain
* Judge expresses concern over conduct of case
By Estelle Shirbon
LONDON, Dec 10 (Reuters) - One of Britain's biggest corruption trials in years came to an abrupt halt on Tuesday when the Serious Fraud Office (SFO) called off the prosecution of businessman Victor Dahdaleh in a further setback for its already tarnished reputation.
The SFO had accused Dahdaleh of paying some $67 million in bribes to former managers of Aluminium Bahrain (Alba), including a member of Bahrain's royal family, between 1998 and 2006 in return for a cut of contracts worth over $3 billion.
The case involved allegations of corruption at senior levels of government and business in Bahrain, a sensitive issue at a time of political unrest in the secretive Gulf kingdom.
But the SFO's lead counsel told a London court there was no longer a realistic prospect of conviction after two U.S. lawyers who had played a crucial role in the case refused to testify in court and a key witness changed his evidence.
The sudden collapse of Dahdaleh's trial, which began on Nov. 5 and had been expected to run into 2014, followed costly blunders by the SFO in other high-profile cases that had piled pressure on the agency to deliver notable convictions.
"I have taken matters up to the highest level at the Serious Fraud Office and consulted the attorney general," said SFO counsel Philip Shears as he announced the SFO's decision. The attorney general is the British government's legal adviser.
Judge Nicholas Loraine-Smith instructed the jury to return 'not guilty' verdicts on all eight counts before discharging them.
"Cases like this rock people's confidence to the core," said legislator Emily Thornberry, the opposition Labour Party's "shadow attorney general" or spokeswoman on judicial affairs.
"I am a critical friend and I want the Serious Fraud Office to do well. But you have to tell the truth to friends. This is a mess and they know it and they should have been able to see it coming and it's very disappointing," she told Reuters.
Judge Loraine-Smith said he had asked the SFO to reconsider its position on Thursday after becoming concerned about evidence given earlier that day by SFO case officer Sasi-Kanth Mallela.
Mallela had told the court that the agency had delegated its investigative duties in Bahrain to Alba's lawyers from the U.S. firm Akin Gump. The American lawyers had provided documents and witnesses to the SFO from the Alba side.
The judge said these lawyers, acting for Alba, were also Dahdaleh's opponents in a "hotly contested" U.S. civil lawsuit, raising questions about the SFO's reliance on them for evidence to use against Dahdaleh in the British criminal trial.
"The defence have raised issues questioning Akin Gump's role in the provision of assistance to the SFO, both as to what their motives may have been in the dissemination of material and assistance as to witnesses," Shears told the court.
"Their refusal to attend creates a situation where the trial process cannot remedy the position and we accept unfairness now exists for the defence," he said, adding that SFO Director David Green had personally called the chair of Akin Gump to try and secure their attendance, to no avail.
Several telephone messages and emails from Reuters seeking comment from Akin Gump were not answered.
Shears said the other main reason for the SFO's decision was that Bruce Hall, a former CEO of Alba who had pleaded guilty to a conspiracy to corrupt with Dahdaleh, changed his evidence in court from what he had said in his witness statement.
Outside court, Dahdaleh's lawyer, Neil O'May of Norton Rose Fulbright, told reporters it was an emotional day for the 70-year-old businessman, who was "overwhelmed and relieved".
"He is concerned, and wishes those who have a supervisory role, within the SFO and outside, to consider how it was that part of the investigation was outsourced to a firm of American lawyers who refused to attend court to give a full account of their involvement," O'May said.
Dahdaleh admitted making payments to Alba managers but pleaded 'not guilty', citing "principal's consent", a defence available under Britain's Prevention of Corruption Act 1906.
In essence, his defence was that the payments were known of and approved by those in authority at Alba and in the Bahraini government, and were part of Bahraini custom and practice.
Dahdaleh was charged under that law because the alleged offences pre-dated the Bribery Act 2010, under which the "principal's consent" defence is no longer available.