The ice is beginning to crack beneath Millennium Partners, the big New York hedge fund run by Wall Street trader and buyout specialist Israel Englander. Over the past several months, lawyers and other sources say, investors have pulled $800 million out of Millennium, in the wake of a guilty plea last September by Millennium trader Steve Markovitz to making illegal mutual fund trades. The redemptions, which sources say coincide with the departure of several traders and back-office employees, have slashed Millennium's total assets under management to about $3.2 billion. The drop in assets under management is particularly sharp -- Millennium had $3.3 billion in its offshore fund as of the end of December plus about $1 billion in its fund for domestic investors, according to the Center for International Securities and Derivatives at the University of Massachusetts. More troubling, legal sources say, state and federal securities regulators looking into allegations of improper trading in the $7 trillion mutual fund industry are stepping up their inquiry into Millennium's role in the scandal. Lawyers familiar with the investigation believe the renewed focus on Millennium could be a prelude to the filing of additional criminal charges, or the imposition of a stiff fine on the giant hedge fund. In recent weeks, a number of witnesses familiar with Millennium and Markovitz have appeared before a New York State special grand jury that is investigating the mutual fund industry, several sources said. One person familiar with the investigation said the grand jury has heard testimony from a number of people in the "Markovitz universe.'' Markovitz, one of the first people on Wall Street arrested in the far-reaching mutual fund trading scandal, pleaded guilty to making illegal late trades in shares of mutual funds. In pleading guilty, Markovitz agreed to cooperate with prosecutors and his sentencing has been delayed several times while Spitzer's office continues its investigation.