* Woodford drops 3-mth battle to return to lead Olympus
* Says was unable to win over big Japan shareholders (Adds detail, background)
By Tim Kelly
TOKYO, Jan 6 (Reuters) - The ousted CEO of Olympus Corp, Michael Woodford, said on Friday he is calling a halt to his three-month battle to replace the management of the scandal-tainted Japanese endoscope maker and to return to lead the battered company.
Despite uncovering accounting fraud at Olympus that revealed hidden losses of $1.7 billion the executive whistleblower failed to win over big Japanese shareholders including the firm's main lenders, which continue to support a board that has been blamed for failing to provide proper oversight.
"Despite my having done the right thing, none of the major Japanese institutional shareholders have offered one word of support to me," Woodford said in a statement sent by email to media organisations.
The decision by Woodford, who was fired as chief executive in October, leaves foreign shareholders, who want a new slate of directors, including U.S. fund manager Southeastern Asset Management, without a champion to lead any proxy battle when the company convenes an extraordinary shareholders meeting as early as March.
Woodford said he would brief the media at 1500 JST (0600 GMT).
The company's main lender and major shareholder Sumitomo Mitsui Financial Group (SMFG) is backing existing management led by CEO Shuichi Takayama, which is seeking a capital tie up with a rival company to bolster its finances.
It's net assets are dangerously thin after it corrected its accounts to include the effects of its 13-year fraud.
Shareholder equity was just 42.9 billion yen ($556 million) at the end of September, or just 4.5 percent of total assets - less than a quarter of what is seen as a healthy cut-off. A 20 percent proportion of equity would imply that it needs to raise about 150 billion yen in fresh equity.
Local media has reported that Sony, Fujifilm Holdings and Panasonic Corp are among the candidates that may ride to the rescue of Olympus.
Japan's big banks such as SMFG and Mitsubishi UFJ Financial Group are often cornerstone investors in Japanese blue chips, with major equity and debt holdings. That puts them in a powerful position to influence board decisions.
In a sign lenders are in the driving seat at Olympus, the company appointed industrialist Shiro Hiruta, with connections to SMFG, as the head of an outside panel to advise the firm on a management shake-up.
Hiruta was formerly head of chemicals firm Asahi Kasei , which has close ties to SMFG, the biggest lender to Olympus with 227.5 billion yen ($2.95 billion) in outstanding loans and bonds, according to company data and sources.
The bank, which declined a request from Woodford for a meeting, also holds a 3.4 percent equity stake in Olympus.
"The cross-shareholding system in Japan, while clearly serving the country well in the years following the Second World War is in today's world harmful," Woodford said in his statement.
"Such a compliant approach removes one of the essential safeguards in relation to governance and also allows the boards of companies which are underperforming to remain in office," he added. ($1 = 77.1100 Japanese yen) (Reporting by Tim Kelly; Editing by Michael Watson and Joseph Radford)