* BaFin investigates possible market manipulation

* Viceroy Research issued critical report on Grenke

* Grenke shares fall as much as 29% (Adds official comment from Grenke)

FRANKFURT/BERLIN, Sept 15 (Reuters) - German financial watchdog BaFin said on Tuesday it was looking into allegations of market manipulation by German financial services provider Grenke following a critical report by a short-seller.

Grenke said in a statement that it strongly rejected allegations made in the report by Fraser Perring of Viceroy Research and that one of the central accusations against it was "demonstrably false".

The report by Viceroy Research, which raised the alarm and bet big against collapsed payment company Wirecard, sent Grenke shares down as much as 29%. It accuses Grenke of malfeasance including money laundering.

"This report contains allegations which Grenke strongly rejects," the company said in a statement. "A central accusation is that a substantial portion of the EUR 1,078 million in cash and cash equivalents reported in the 2020 half-year financial report does not exist. This is demonstrably false."

Grenke said it was preparing a detailed reply to the accusations, adding it reserved the right to take legal action.

BaFin said in a statement that it was investigating the allegations of market abuse in the report.

The watchdog said its probe included possible market manipulation by Grenke through accounting issues or by third parties in the form of an attack by short sellers.

Possible insider trading before the Viceroy report's publication was also under review, BaFin said.

Perring said Viceroy had posted two copies of its report on Grenke to BaFin, once in July and once this month, before publishing it on Tuesday.

"We are ready to cooperate with regulators," he told Reuters. "We are happy to show where the irregularities lie."

Grenke, founded in 1978, with 1,700 employees in 32 locations around the world, is listed on Germany's MDAX index of mid-cap companies. It provides mainly small and medium-sized companies with leasing, banking and factoring services.

The shares posted their biggest ever intraday drop to trade at the lowest level in more than five years. At 1527 GMT, shares were down 20% at 44.12 euros, up from a low of 39.30 euros ($46.56). ($1 = 0.8441 euros) (Writing by Tom Sims and Christoph Steitz; Editing by Thomas Escritt, David Evans and Howard Goller)