BENGALURU, Sept 24 (Reuters) - The Indian state of Karnataka, home to India"s Silicon Valley, has proposed a ban on online games involving betting and wagering, sparking concerns that growing state regulations could hit the nascent but booming sector. Karnataka is proposing an amendment to the Karnataka Police Act to include such online games, seeking to ban "any act or risking money, or otherwise on the unknown result of an event including on a game of skill," according to the bill seen by Reuters. Many offences under the law already attract prison time, and the bill proposes to increase these penalties. The Karnataka government has said the bill is needed as youngsters from rural areas, mostly idle in the city during the COVID-19 pandemic, "have shown a tendency of becoming habitual gamblers." It comes as online fantasy gaming platforms such as Tiger Global-backed Dream11 and Sequoia Capital-funded Mobile Premier League (MPL) that offer fantasy cricket and football games have become increasingly popular in India. Karnataka, home to some of the world"s biggest tech companies and India"s tech capital Bengaluru, is the fourth Indian state to seek to ban online games involving prize money after Telangana, Tamil Nadu and Andhra Pradesh. "Business of MPL, Dream11 and everyone in the sector will suffer," said one gaming industry source, who declined to be named because the person was not authorised to speak to the media. "These states are important - they roughly account for 20% of (the total) business for such companies." The online gaming industry in India has grown over the past few years. Foreign investors have shown growing interest in backing Indian gaming startups since last year as the COVID-19 pandemic drove people stuck indoors towards such games. India currently has more than 400 online gaming startups and, as of 2020,had around 360 million gamers, according to an EY-All India Gaming Federation report. Online gamers are expected to grow to 510 million by 2022 and the industry will be worth $2 billion by 2023, the report said. The Dream11 and MPL platforms, offering paid contests with cash prize for players, have expanded rapidly in recent months with extensive marketing and hires. Dream11 is seeking a U.S. listing by early next year, local media has said. Such growth has sparked concerns that these platforms, like gambling, are addictive and can cause financial harm. India"s Tamil Nadu, Telangana and Andhra Pradesh states have all banned online gaming offering cash prizes over the past few years, though Tamil Nadu"s bill was subsequently struck down by its high court. Sandeep Chilana, a New Delhi-based lawyer, said such laws have a weak legal standing given the Supreme Court has repeatedly said skill games - like fantasy cricket - are not like gambling which remains largely prohibited across India. "Indian states are overreaching and will face legal challenges by banning such skill games," said Chilana. The Karnataka proposal also comes at an inconvenient time for the industry, during the popular Indian Premier League cricket tournament. Fantasy gaming competitions around the tournament are one of the biggest fee generators for online gaming companies, said a second industry source, who asked not to be identified. The potential ban will also hurt professional players, said Esports Players Welfare Association, a non-profit for online gamers. "Games and esports are areas where skill can be developed as a result of which it is not a sin activity," the group said.