(Reuters) - Legendary natural gas trader John Arnold is closing down his flagship Centaurus fund, a source said on Wednesday, as the former Enron wunderkind struggled to maintain outsized returns with prices near 10-year lows and regulations tightening.

Centaurus, famed for gaining more than 300 percent in 2006 by taking bets opposite to those held by failed rival Amaranth Advisors, will return capital to investors, according to an investor in the fund who said he had received a letter from Arnold earlier on Wednesday.

A person who answered the phone at Centaurus' Houston office said no one was available to comment.

The Centaurus Energy Master Fund is the biggest one that is open to outside investors, the source said. Arnold had a total of about $4 billion assets under management last year, although the source estimated that the Master Fund held around $2 billion.

After the fund suffered its first-ever annual loss in 2010, Arnold, who turned 37 last year, reduced its size because of diminishing market volatility and tough new limits on commodity speculators. He returned $1 billion of capital to investors last summer. The fund gained less than 10 percent in 2011.

U.S. natural gas futures extended earlier losses on news that one of the market's biggest traders was calling it quits. June futures dropped by as much as 5 percent, reversing a rebound in prices from a 10-year low two weeks ago.

The market is viewing the fact that Centaurus is a big player and they are going to have to liquidate, said Dominick Chirichella, senior partner at Energy Management Institute.

I think it is an overreaction. If they announced this today, they have probably already closed the vast majority of their positions already.

Initially renowned as one of the youngest and best traders to emerge from Enron over a decade ago, Arnold went on to make his name as one of the most aggressive and successful hedge fund managers in the volatile natural gas markets, accumulating a $3 billion personal fortune, according to Forbes.

Despite less than stellar recent returns, Arnold's fund was the biggest and one of the most successful in the industry, with a compound annual return of about 130 percent since he founded it in 2002 after the collapse of energy merchant Enron.

However, after the 2008 financial crisis, the Commodity Futures Trading Commission moved to put new limits on speculators in the market, crimping his style, investors have said. Centaurus has been given small fines in recent years for violating position limits on NYMEX natural gas.

He is not the only commodity fund manager to opt out after one of the most industry's difficult years. Pierre Andurand and his partners said a month ago they would shut down BlueGold Capital, an oil-oriented fund, after a 35 percent slump in 2011. Billionaire George Soros said a year ago that he would stop managing outside money, converting his fund to a family office.