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UPDATE 1-ING clinches first Asia asset sale with AIA Malaysia deal -sources

* Announcement expected as early as Thursday

* Manulife, Richard Li still vying for other Asian units

* Deal to boost AIA's Malaysian ranking to No. 2

(Adds details of other Asian sales, background)

By Denny Thomas and Saeed Azhar

HONG KONG/SINGAPORE, Oct 10 (Reuters) - Pan-Asian insurerAIA Group Ltd has agreed to buy ING'sMalaysian insurance unit and is expected to pay $1.5 billion to$1.7 billion, handing the Dutch financial services firm itsfirst deal in a nine-month drive to sell off Asian assets.

A deal could be announced as early as Thursday, althoughlast-minute regulatory hurdles could delay the signing of theagreement, sources familiar with the process told Reuters onWednesday.

AIA was in the lead to buy both the Malaysian and Thai unitsof ING, sources familiar with the matter told Reuters in earlySeptember. However, ING is now bundling the Thai unit with itsmuch larger Japan and Hong Kong operations and selling thatgroup to another suitor, the sources said.

The AIA deal marks the first sale in an ING auction of Asianinsurance operations announced in January, as part of a globalasset sell-off to repay 10 billion euros ($12.9 billion) instate aid received during the 2008 global financial crisis.

The race to buy ING's Japan, Hong Kong and much smallerThailand operations is still on, with Canada's ManulifeFinancial Corp and Hong Kong business tycoon Richard Liin the running, one of the sources said. KB Financial Group

is in advanced talks to buy ING's South Koreanoperations, sources have told Reuters.

ING originally had wanted to sell its entire Asia insuranceoperation, with a book value of 6.1 billion euros ($7.8billion), to one buyer.

For AIA, the deal marks the second acquisition in less thanone month after it agreed to buy British insurer Aviva Plc's

Sri Lankan operations for $109 million. .It also should boost AIA's Malaysia ranking to No. 2 from No. 4,unseating rival Prudential Plc , analysts said.

AIA shares are up 22 percent so far this year, outpacing a13.4 percent rise in the Hong Kong financial subindex .Deutsche Bank and Morgan Stanley are advising AIA on the deal.ING is being advised by Goldman Sachs and J.P. Morgan.

The sources declined to be identified as the information hasnot yet been made public. ING, AIA, Manulife and a spokesman forRichard Li declined to comment.

($1 = 0.7754 euros)

(Additional reporting by Clare Baldwin; Editing by MichaelFlaherty and Edmund Klamann)

((denny.thomas@thomsonreuters.com)(+852 2843 6358)(ReutersMessaging: denny.thomas.reuters.com@reuters.net))

Keywords: ING AIA/MALAYSIA