One more try - maybe I can explain what happens a bit better now to allow you gurus to potentially understand where the issue might be...
I managed to get the LS back into NW again, it appeared in NASnav in emergency mode. I started the firmware updater using the LSupdater which found the LS from the NW neatly.
The transfer of the FW worked as charm (according the updater). After transferring the LS updater commended the LS to boot, which it did. After booting up the LS power led was blinking with 2 long yellow after 5 short, so I25 (updating FW) so all good. After a while the LSupdater commanded the LS to boot again, which it did.
BUT, after this 2nd boot the FUNCTION LED was glowing RED for about 2 minutes. POWER LED blinking blue as normal, all disks leds seems OK. The LS has not responded any calls in the NW. Ping says "Destination host unreachable". LS Updater is stuck in "Linkstation Booting" status and just informed "LS hasn't been reached for past 1200 seconds, do you want to continue?". I responded "yes" and waiting now another 1200 seconds go by and getting the same error. The LS cannot be turned of using POWER BUTTON, it does not respond to pressing it at all.
So it seems the whole LS gets stuck on the second boot in the LSUpdater process and is not finishing it properly. It does not boot up to the NW properly and also gets fully stuck not even responding to power button. All is OK on the router side. The most interesting part within that second to me is the function led glowing solid RED as I can't find such color coding for function led anywhere in manuals or in forums.
Would appreciate if anyone has any ideas why this could happen. Thanks in advance for your help.