* Former rebel leader's brother held after Interpol notice
* Family rejects charges against him
* Oil blockade costs Libya billions
By Patrick Markey and Ghaith Shennib
TRIPOLI, Feb 12 (Reuters) - The brother of a former rebel who has blockaded Libyan oil ports was held in Dubai after Tripoli issued an Interpol notice for his arrest on charges of trying to smuggle oil, Libyan government officials said.
The arrest of the brother of Ibrahim al-Jathran, whose blockade has cost the state billions of dollars, came as the government wages a campaign of attrition to weaken his movement for more autonomy and control of oil wealth in eastern Libya.
Members of the protest movement and Jathran's relatives confirmed his brother Khalid's arrest, but rejected the charges, accusing the government in Tripoli of fabricating the investigation to pressure Jathran by acting against his family.
Nearly three years after the fall of Muammar Gaddafi, the oil port blockade is one of most serious challenges in Libya's struggle to rein in former rebels who once fought Gaddafi but now refuse to accept the state's authority.
A former anti-Gaddafi rebel who become a commander of a state force set up to guard oil installations, Jathran and his troops defected in August and seized three oil ports, set up a self-styled government and cut off around 600,000 barrels a day of crude export capacity.
A senior Libyan government source and an official in the prosecutor's office said Khalid Jathran was arrested in the United Arab Emirates after Libyan authorities filed a "red notice" with Interpol, the international police agency.
"He is wanted for trying to sell Libyan oil illegally. The process of extradition is underway," the senior government source said, asking not to be identified.
Jathran has threatened to sell Libya's crude independently, but analysts say few would take the risk of loading oil seen as smuggling by Tripoli.
Siddiq al-Sour, a chief investigator in the state prosecutor's office, said Khalid Jathran was arrested in the United Arab Emirates when he had tried to renew his passport at the Libyan embassy.
"The information we got from Interpol is that he was arrested and detained," he said. "A delegation will be sent to the United Arab Emirates within days, and we expect the cooperation from the authorities there."
He said he was wanted on charges related to the oil protests and attempts to smuggle Libyan crude.
A security source in Dubai said Khaled Saeed Salem Awad, which relatives said was the brother's full family name, was arrested at the request of Libyan authorities made through Interpol. He was released on bail pending the receipt of the necessary papers from Libya required for him to stand trial.
It was not clear how long any extradition proceedings would take, if they were requested.
The accusations in the Interpol red notice are that he is a member of a criminal gang and that he has committed theft.
But his family dismissed those accusations, saying Khalid is a businessman who had been studying in the United Arab Emirates. Relatives did not immediately respond to a request to speak to his lawyer, but they said he was free.
"He has been arrested for one day, investigated and released, he is not under any house arrest," Salam Jathran, another of his brothers, told Reuters.
"What damage can he do to public money? He's not an official to be corrupted. Libyan authorities have made up all of these charges to put pressure on us as he is the only brother located outside Libya."
Asked to confirm the arrest, Interpol's press office said in an email that it does not usually comment on specific cases. It referred requests for information to the Libyan authorities.
Interpol red notices are the way the agency informs its 190 member countries that an arrest warrant has been issued by a judicial authority. While Interpol cannot enforce the notice, many countries consider it a valid request for a provisional arrest while they seek extradition.
Months ago the government issued an arrest warrant for Jathran himself, accusing him of damaging the state by shutting down oil exports that account for more than 90 percent of state revenues. Libya has lost more than $7 billion in revenues since the protest began, according to government figures. (Additional reporting by Feras Bosalum in Tripoli and William Maclean in Dubai; Editing by Giles Elgood)