By Soham Chatterjee

(Reuters) - NQ Mobile Inc, a Chinese mobile security software maker facing allegations of fraud from short-seller Muddy Waters Research Group, said it dismissed PricewaterhouseCoopers Zhong Tian LLP as its independent auditor.

NQ Mobile shares fell as much as 21 percent in early trading before reversing course to trade up almost 15 percent by midday.

PricewaterhouseCoopers Zhong Tian told NQ in June that it needed to expand the scope of the company's 2013 audit, days after NQ said an independent committee had found no evidence of fraud.

Earlier this month, Muddy Waters alleged that the company was misrepresenting the true state of its audit and relationship with PwC Zhong Tian. (http://bit.ly/1kCSHGw)

NQ did not give a reason on Friday for the dismissal of PwC Zhong Tian, but said it had hired Marcum Bernstein Pinchuk LLP as its new auditor.

"PwC's refusal to issue an audit opinion results from the fact (that) NQ is a fraud," Muddy Waters founder Carson Block told Reuters in an email. "By not issuing any opinion, PwC effected a backdoor resignation that attempts to save face for its client."

NQ's stock has been volatile since Muddy Waters made the allegations in October, plunging from a high of $25.90 just before the report was released to a low of $4.13 earlier this month.

The stock is heavily shorted, with more than a quarter of its outstanding shares in short positions.

Short-sellers make money when the stock price of a company drops. They sell borrowed shares in the hope of buying them back at a lower price, returning them to the lender and pocketing the difference.

Muddy Waters' previous targets include U.S.-listed Chinese companies such as the now-bankrupt Sino-Forest and Longtop Financial Technologies, which gained notoriety for fraudulent reporting and asset stripping.

(Reporting By Subrat Patnaik in Bangalore; Editing by Kirti Pandey and Saumyadeb Chakrabarty)