Prosecutors in South Korea have decided to arrest Hyundai Motor chairman Chung Mong-koo, according to Reuters.

Shares fell 3% after the news amid fears that the absence of Chung could create a leadership vacuum.

He is being charged with making a 100bn won ($US105.7m) slush fund and causing 300bn won worth of damage to the company through breach of trust. Such a crime could carry a life sentence.

Chung's son, Chung Eui-sun, president of Kia Motor, will be indicted and not detained, the news agency added.

Prosecutors told Reuters that there could be further arrests of Hyundai executives.

Automotive industry representatives have petitioned for Chung to be treated with leniency because of his importance to the growth of the sector.

Reuters said analysts are fearful his absence could detail Hyundai's ambitions to become the fifth largest vehicle maker by 2010 - Hyundai and Kia combined are currently seventh largest.