* Merkel friend accepts 3-1/2 year sentence, won't appeal
* Resigns as Bayern Munich president and business chairman
* Hoeness says tax evasion was biggest mistake of his life (Adds reaction from Merkel, background)
By Jens Hack
MUNICH, March 14 (Reuters) - Uli Hoeness said on Friday he would accept a 3-1/2-year prison term for evading 27 million euros ($37.6 million) in taxes and resigned as president and chairman of Bayern Munich, the club he made into one of the world's most successful football dynasties.
Hoeness, 62, a household name in his country and friend of Chancellor Angela Merkel, had admitted evading taxes on income earned in secret Swiss bank accounts but hoped for leniency in one of the most scrutinised cases of its kind ever in Germany.
"After discussions with my family I have decided to accept the ruling of the Munich court on my tax affairs. This befits my understanding of decency, dignity and personal responsibility," he wrote in a statement published on the Bayern website.
"Tax evasion was the biggest mistake of my life."
Judge Rupert Heindl ruled on Thursday that Hoeness's voluntary disclosure was incomplete and therefore did not meet a vital requirement of amnesty laws designed to encourage tax dodgers to come clean.
Hoeness, a former star footballer adored by Bayern Munich fans, had been a popular TV talk show guest and ironically had spoken out for higher taxes and railed against tax evasion.
"The chancellor respects the decision Mr Hoeness took today," Merkel's spokesman Steffen Seibert said. He declined to give details of a lunch between the chancellor and Hoeness that took place the day before Hoeness decided to turn himself in - a meeting that has been the subject of media speculation.
The case hinged on the question of whether Hoeness, who as a player helped West Germany win the 1974 World Cup, cooperated fully with his voluntary disclosure. The court decided he took too long to provide information, and it was riddled with errors.
His case profoundly shocked Germany, where tax evasion is considered a serious crime, and prompted thousands of tax dodgers to turn themselves in.
It caused deeper shock than when Peter Graf, the late father of former tennis champion Steffi Graf, was exposed as a tax cheat during the height of her career. He was sentenced in 1997 to three years and nine months for evading 12.3 million marks (6.3 million euros) and released after 25 months.
Germany's centre-left deputy chancellor, Sigmar Gabriel, said the sentence for Hoeness showed "justice has been done". He called for the directors of Swiss banks that hide such funds to be hauled before the courts.
Hoeness was first charged with evading 3.5 million euros in taxes. But when the trial began on Monday he stunned the court by admitting he had actually evaded five times that amount - or 18.5 million euros.
That figure was subsequently raised further to 28.5 million euros - a figure acknowledged by Hoeness's defence team.
Hoeness said he would leave his posts with the club in order to spare Bayern Munich, a team which last year won the Champions League and which dominates the German Bundesliga, any damage.
"Bayern Munich is my life's work and will also remain so," he said.
The club's earnings have soared under his stewardship, which has lasted 35 years in various posts. It has more than 220,000 club members, many of them fans, who have a vote at annual Bayern Munich policy meetings.
FC Bayern Munich AG is privately owned. Major German companies Adidas AG ADSGn.DE, Allianz ALVG.DE and Audi AG VOWG_p.DE, all of which are based in the state of Bavaria, each have an 8.3 percent stake in the club. Deutsche Telekom AG DTEGn.DE is the club's main advertising sponsor.
Bayern Munich named Herbert Hainer, the CEO of Adidas, to replace Hoeness as chairman of the supervisory board and vice president.
Board members include Audi CEO Rupert Stadler, Volkswagen CEO Martin Winterkorn and Deutsche Telekom CEO Tim Hoettges. ($1 = 0.7180 Euros) (Reporting by Alexandra Hudson; Editing by Stephen Brown and Mark Heinrich)