* Kim Dotcom argues poses no threat of absconding
* Judge says too complicated for immediate bail decision
* Dotcom smiles and waves to supporters in court
* More arrests in case in Europe
* Rival website stops file sharing service
AUCKLAND, Jan 23 (Reuters) - The founder of file-sharing website Megaupload was ordered to be held in custody by a New Zealand court on Monday, as he denied charges of internet piracy and money laundering and said authorities were trying to portray the blackest picture of him.
Prosecutor Anne Toohey argued at a bail hearing that Kim Dotcom, a German national also known as Kim Schmitz, was a flight risk "at the extreme end of the scale" because it was believed he had access to funds, had multiple identities and had a history of fleeing criminal charges.
"The FBI believes the sums located are unlikely to represent all the overseas bank accounts owned by Mr Dotcom," she said.
But Dotcom's lawyer said he posed no threat of absconding or restarting his businesses, arguing that his client had cooperated fully, his passports had been seized and his funds frozen, and also that he had a distinctive appearance.
"He is not the sort of person who will pass unnoticed through our customs and immigration lines and controls," said defence lawyer Paul Davison of the former hacker, reportedly 2 metres (6ft 6ins) tall and weighing more than 130 kg (285 lbs).
Judge David McNaughton said the bail application was too complicated for an immediate ruling, adding he would issue a written decision no later than Wednesday.
"Given the breadth of issues covered in this bail application and the seriousness of the issues, I am going to reserve my decision," the judge said.
U.S. authorities want to extradite Dotcom on charges he masterminded a scheme that made more than $175 million in a few short years by copying and distributing music, movies and other copyrighted content without authorisation. Megaupload's lawyer has said the company simply offered online storage.
Prosecutor Toohey said two other men sought on global warrants for involvement in Megaupload had been arrested in Europe.
The shockwaves of the case appeared to be spreading among rival websites offering lucrative file-sharing. FileSonic, a website providing online data storage, said in a statement on its website that it had halted its file-sharing services.
"All sharing functionality of FileSonic is now disabled. Our service can only be used to upload and retrieve files that you have uploaded personally," it said.
BARRICADED IN SAFE ROOM
Dotcom, 38, and three others, were arrested on Friday after New Zealand police raided his country estate at the request of the U.S. Federal Bureau of Investigation. Police cut Dotcom out of a safe room he had barricaded himself in, because, according to his layer, he was frightened and panicked.
Presenting the case for flight risk, the prosecutor said 45 credit cards in three wallets were found in the mansion under Dotcom's various names, while three passports were also found. But his defence lawyer said: "My client collects them (credit cards), most of them are out of date."
Dotcom smiled and waved at around 20 supporters who filled the courtroom and spoke to them after the judge's decision.
"Hey guys thanks for turning up, I appreciate it," he said, wishing a female supporter a "happy birthday".
Defence lawyer Davison said Dotcom was "realistic about what is happening".
"He would obviously prefer to be at large. He doesn't want to be there any longer than he absolutely has to be," he told reporters outside the court.
Media reported that Dotcom ordered around NZ$4 million ($3.2 million) of renovations to the sprawling mansion that he leased near Auckland, with its manicured lawns, fountains, pools, palm-lined paths and extensive security.
The case is being heard as the debate over online piracy reaches fever pitch in Washington, where Congress is trying to craft tougher legislation.
Lawmakers stopped anti-piracy legislation on Friday, postponing a critical vote in a victory for Internet companies that staged a mass online protest against the fast-moving bills.
The movie and music industries want Congress to crack down on Internet piracy and content theft, but major Internet companies such as Google and Facebook have complained that current drafts of the legislation would lead to censorship.
Critics of the U.S. Stop Online Piracy Act, or SOPA, and Protect IP Act (PIPA), quickly showed their opposition to the shutdown of Megaupload.com, with hackers attacking the public websites of the Justice Department, the world's largest music company Universal Music, and the two big trade groups that represent the music and film industries.
Dotcom's New Zealand lawyer Davison said in court that Megaupload's business was being misrepresented and authorities were being aggressive to add drama to the case.
"His business did not reproduce or copy material as alleged," he told the court, adding that copyright holders had been given access to Megaupload to identify improper posting of material. He likened the site to the popular YouTube video site, where people "promoted their creativity".
In New Zealand, questions are being asked about how Dotcom, who moved to the country in 2010, could be given permanent residency under a business investor scheme despite criminal convictions for insider trading.
A legal expert said extradition arrangements between New Zealand and the United States were reasonably straightforward and standard, but there were some important factors.
"The offence for which extradition is sought must be an offence in the jurisdictions of both states," said Otago University law professor Kevin Dawkins, adding that an accused must be tried on the offence for which they are extradited.
New details emerged about Dotcom's lavish lifestyle and tastes, with reports that he had a heated lap pool built just off the master ensuite, with underwater speakers, imported spring water and a custom ladder worth around NZ$15,000.
"It's insane, and it gets more insane inside. When we were there we called it 'extreme home makeover, millionaire edition'," a source close to the teams that did renovation work the New Zealand Herald.
A film posted on the Internet shows Dotcom, surrounded by topless women and men spraying champagne on board a superyacht during a "crazy weekend" in Monaco reported to have cost $10 million.
"Fast cars, hot girls, superyachts and amazing parties. Decadence rules," said the commentary accompanying the so-called fun documentary, which Dotcom dedicated to "all my fans".
The FBI estimates that Dotcom personally made around $115,000 a day during 2010 from his empire. The list of property to be seized, includes nearly 20 luxury cars, one of them a pink Cadillac, works of art, and NZ$10 million invested in local finance companies. ($1 = 1.2433 New Zealand dollars) (Additional reporting by Gyles Beckford in Wellington and Ed Davies in Sydney; Editing by Ed Davies and Alex Richardson)