By David Ingram

NEW YORK (Reuters) -- Manhattan's top federal prosecutor abandoned a high-profile insider trading case against Michael Steinberg, formerly a top portfolio manager at SAC Capital Advisors, and six others on Thursday, saying the case was no longer consistent with the law.

U.S. Attorney Preet Bharara in a statement said his decision was based on a December ruling from a federal appeals court that more narrowly defined what constitutes insider trading. The U.S. Supreme Court this month declined to review that decision.

Steinberg had been sentenced to 3-1/2 years in prison after his 2013 conviction at trial, and his defense lawyer welcomed the decision to drop charges.

"Michael Steinberg did not commit any crime and is an innocent man. We hope that his vindication will receive as much attention as his wrongful prosecution," Barry Berke, his lawyer, said in a statement.

Last year, the 2nd U.S. Circuit Court of Appeals curtailed prosecutors' ability to pursue insider-trading cases.

The appeals court threw out the 2012 convictions of hedge fund managers Todd Newman and Anthony Chiasson, who like Steinberg were convicted for trading on inside information about Dell Inc and Nvidia Corp, saying the government had over-reached.

"These prosecutions were all undertaken in good faith reliance on what this office and others, including able defense counsel for all those who pled guilty, understood to be the well-settled law before Newman," Bharara said.

SAC Capital last year rebranded itself Point72 Asset Management as it shifted toward being a family office managing the fortune of SAC founder Steven A. Cohen. Prosecutors never charged Cohen with a crime.

Bharara also said it "would not be in the interests of justice" to insist on maintaining the convictions of six cooperating witnesses, even though they pleaded guilty as part of the same alleged scheme.

The six cooperators were Spyridon Adondakis, Sandeep Goyal, Jon Horvath, Danny Kuo, Hyung Lim and Jesse Tortora.

Kuo's lawyer Roland Riopelle said Bharara's office "chose to do the right thing, even if doing so was not the politically easy thing to do. With this matter behind him, Mr. Kuo looks forward to getting on with the rest of his life."

(Reporting by David Ingram; Additional reporting by Nate Raymond; Editing by Meredith Mazzilli)