SINGAPORE, March 2 (Reuters) - Betting payouts following U.S. attacks on Iran have thrown new scrutiny on prediction markets, which took wagers on the timing of bombing and removal of Ayatollah Ali Khamenei from power.

Khamenei was killed in Israeli strikes over the weekend.

Odds moved sharply as rumours of his death circulated and analysts drew attention to a wave of wagers placed on his ouster both right before the attacks, as well as in January, while critics questioned the legality of the markets.

A total $529 million was laid on a series of Polymarket contracts tied to the timing of attacks - returning payouts to those who bet on Saturday as the date of the first strikes - and $150 million across two now-disputed contracts on the removal of Khamenei as supreme leader.

Analytics firm Bubblemaps said on X that six accounts made a $1.2 million profit from Polymarket bets funded in the hours before Saturday's raids. Separately, Polysights, another analytics platform, had noted on X a wave of buying in mid-January from new wallets, with little or no prior activity, on Iran-related contracts, concentrated in Polymarket wagers on "Khamenei out" by the end of March.

Polymarket had no immediate response when contacted by email. Its "Khamenei out" contracts are in a "debate period" after token holders disputed its resolution.

Rival Kalshi also ran a market on "Khamenei out" and ended up reimbursing fees to traders and returning payouts at the last-traded price before his death, according to the CEO who took to social media to defend the firm's handling of the bets.

"When there are markets where potential outcomes involve death, we design the rules to prevent people from profiting from death. That is what we did here," Kalshi chief Tarek Mansour said on X.

LEGAL QUESTIONS

Prediction markets offer tradable yes-or-no contracts that allow users to bet on a wide range of real-world events from sports to politics and the economy. Bet costs fluctuate between zero and 100 cents, depending on order flow, and typically pay $1 to successful bettors when an outcome is confirmed.

Under U.S. law, wagers contrary to the public interest - which may involve war or assassination - are prohibited and last month six Democrat senators had raised concerns prediction markets breached the rules, in a letter to the Commodity Futures Trading Commission (CFTC).

"It's insane this is legal... I'm introducing legislation ASAP to ban this," Senator Chris Murphy, a Connecticut Democrat, said on X on Sunday in response to Bubblemaps' post about Polymarket bets. Murphy was not one of the signatories of the six Democrats' letter.

Prediction markets exploded in popularity since the 2024 U.S. election, when their real-time probabilities proved more accurate than polling in predicting Donald Trump's victory.

Last year prediction markets saw $47 billion in global trading volume, according to analysts at brokerage Clear Street, a betting plunge that is attracting legal blowback and flattering attention from Wall Street.

New York Stock Exchange parent ICE ICE.N has taken a $2 billion stake in Polymarket, while trading platform Plus500 PLUSP.L last month launched prediction markets on its U.S. retail interface through a partnership with Kalshi.

They have also faced scrutiny for insider trading and have grown in a regulatory grey zone, with the prediction markets arguing that they be regulated under the CFTC, not state gambling authorities.

In January a mystery trader made a roughly $410,000 profit after betting on the ouster of Venezuelan president Nicolas Maduro.

(Reporting by Tom Westbrook and Gregor Stuart Hunter in Singapore. Editing by Sam Holmes)

((tom.westbrook@tr.com; +65 6973 8284;))