By Elizabeth Koh

A panel of civilian experts dealt a blow to South Korean prosecutors investigating Samsung Electronics Co.'s de facto leader Lee Jae-yong Friday by recommending they suspend an investigation into allegations of financial fraud tied to a 2015 merger.

After meeting for several hours at the Supreme Prosecutors' Office in Seoul, the panel of outside experts called for not proceeding with an indictment in the case against Mr. Lee, 51 years old, who is officially Samsung's vice chairman but has led the group since his father's heart attack in 2014. Though the recommendation isn't legally binding, prosecutors have previously followed the panel's decisions when it has been convened for cases.

It is the second legal boost for the Samsung scion in a month: Prosecutors unsuccessfully attempted to secure an arrest warrant in a Seoul court in early June in connection with the same probe into the 2015 merger that strengthened his control over the business conglomerate.

The panel's recommendation gives Mr. Lee and his legal team leverage against prosecutors who have been probing the conglomerate's financial dealings for more than 19 months. Investigators have brought in hundreds of Samsung officials for questioning, made dozens of search-and-seizure requests and sent some high-level executives to prison.

Mr. Lee's lawyers, who have denied the charges against him, said they respected the panel's decision. Prosecutors said they will evaluate the panel's recommendation before deciding whether or not to indict Mr. Lee.

Analysts say Mr. Lee remains vulnerable to the widening legal fallout that clouds his ascension to the helm of one of the world's largest corporate empires.

The businessman could still go back to prison on related bribery charges for which he was convicted nearly three years ago, but freed early on appeal. The country's Supreme Court struck down the appeals court's decision last year and ordered a new hearing to determine the final sentence.

Mr. Lee's lawyers recently called for a review of his case by the panel, a randomly drawn group of 15 experts -- somewhat similar to an American grand jury or Japanese prosecutorial review commission. The review panel process was created as part of a slate of changes by President Moon Jae-in's administration to curb what critics have labeled prosecutorial overreach in recent years, said Park Yong Chul, a criminal-law professor at Sogang University in Seoul.

Mr. Lee's request was a calculated gamble, Mr. Park said, adding "if it was just up to the prosecutor's office, they were going to bring the indictment."

Mr. Lee has been under scrutiny over the controversial merger of Samsung affiliate Cheil Industries Inc. with Samsung C&T Corp. for years. In 2017, he was imprisoned, indicted and charged with bribing an adviser to South Korea's former president in exchange for help approving the deal.

Though an appeals court reduced his five-year sentence the following year, allowing Mr. Lee to leave prison, the case remains open and Mr. Lee could still face more prison time at a new hearing that could stretch into next year.

Samsung has acknowledged the continuing legal issues have affected its operations, coming as it seeks to chart a financial path out from the economic rout caused by the global pandemic. In a statement earlier this month, the company said the investigation "has been affecting management normalization," spanning 19 months with more than 50 search-and-seizure requests and over 400 summons by prosecutors.

Samsung has emphasized Mr. Lee's central role at the company in past weeks. Mr. Lee doesn't run day-to-day operations but must sign off on any significant business moves or investments.

The company and Mr. Lee have also responded to more longstanding criticisms of corruption and its management practices, including creating an outside compliance monitoring committee at the suggestion of a judge in Mr. Lee's bribery trial.

The panel's conclusion that the investigation should be suspended may reinforce a belief among many South Koreans that the country's powerful chaebol, as its biggest conglomerates are known, are mostly immune from legal consequences.

"We have a saying in Korea that any political power lasts five years, but a chaebol's power is forever," said Mr. Park, the Sogang University professor, referring to the single, five-year term tenure of Korean presidents.

Write to Elizabeth Koh at Elizabeth.Koh@wsj.com