* Spain's Martin-Artajo released after arrest
* Will remain under court supervision until faces charges
* Signals not willing to be extradited -source
By Sarah White and Carlos Ruano
Aug 27 (Reuters) - Spanish police arrested former JP Morgan Chase trader Javier Martin-Artajo on Tuesday as he prepares to fight possible extradition to the United States over a $6.2 billion financial scandal at America's largest bank.
The arrest came after the United States charged Spaniard Martin-Artajo and a junior colleague, Frenchman Julien Grout, with wire fraud and conspiracy to falsify books and records related to the trading losses, which were executed by Bruno Iksil.
Iksil, who was nicknamed the "London Whale" for his large bets on derivatives markets, is cooperating with U.S. prosecutors and has not been charged.
Martin-Artajo was released on condition that he stay in Spain and check in regularly with a court. A judicial source said on Tuesday that Martin-Artajo had told a Spanish court he is unwilling to be sent to the United States to face the charges.
Martin-Artajo, who turned himself in at a Madrid police station after being contacted by police, is accused of trying to inflate the value of trading positions held on his group's books. The mismarking allegedly took place as the traders tried to hide mounting losses in an illiquid derivatives market, where they had made outsized bets.
Martin-Artajo was Iksil's supervisor at JP Morgan's Chief Investment Office in London.
JPMorgan is battling to salvage its corporate image amid a swirl of litigation and investigations in the wake of the financial crisis, including a federal bribery investigation into whether it hired the children of key Chinese officials to help it win business.
The bank's boss Jamie Dimon attempted to dismiss the London Whale losses as a "tempest in a teapot", but this remark has come back to haunt him.
The bank's penalties over this "London Whale" probe are expected to be $500 million to $600 million, the Wall Street Journal reported, citing people familiar with the matter.
Martin-Artajo previously said through lawyers that he expects to be cleared of any wrongdoing and that he had cooperated with regulators.
His lawyer in London could not immediately be reached for further comment.
Spain's High Court has taken on his case, meanwhile, and will decide whether he should be extradited, although Spain's cabinet has its say too. The United States has 40 days after his arrest to present its full extradition request to Spanish courts, according to the usual procedure.
Extraditions from Spain to the United States are rare and Madrid has tended to shun requests to send its citizens to be tried there.
"Spain does not extradite its citizens," a police source said, explaining that it was one of the reasons Martin-Artajo was not directly arrested but asked to present himself to police, after he was found, identified and deemed not to be a flight risk.
But one extradition lawyer who declined to be named said Martin-Artajo's alleged offence would in principle be considered extraditable, as it is punishable in both countries. Either way, administrative and judicial procedures can take many months.
Martin-Artajo handed himself in to police after they found him and got in touch with him, the authorities said, without detailing where they had tracked him down.
Former JPMorgan colleague Julien Grout, now living in his native France, has not been arrested, his lawyer said.
"No, they have not arrested Julien, nor would they because France does not extradite their own citizens," said Grout's U.S. lawyer Edward Little at Hughes Hubbard & Reed. "We are in discussions with the U.S. prosecutors about how we will proceed, but no decision has been made yet."
Grout, who reported to Iksil and is the lowest-ranked person so far targeted in the investigation, is in his mid-thirties and is married to an American. His lawyer previously said he had moved to France several months ago and was not fleeing anything.
A source with knowledge of the matter has said Grout would offer to face the charges in the United States on condition he is granted bail. Earlier this month, Grout declined to answer questions from a Reuters reporter at his parent's holiday home in southern France.