UPDATE 1-ING to sell Malaysian insurance unit to AIA for 1.3 bln euros

(Adds quote, details)

AMSTERDAM, Oct 11 (Reuters) - ING said it hasagreed to sell its Malaysian insurance unit to pan-Asian insurerAIA Group Ltd for 1.3 billion euros ($1.68 billion) incash, kicking off the Dutch group's long-awaited divestment ofAsian assets.

The deal, which confirmed a report by Reuters earlier onWednesday, 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 in state aid receivedduring the 2008 global financial crisis.

ING originally wanted to sell its entire Asia insuranceoperation, with a book value of 6.1 billion euros, to one buyerbut had said it was willing to split up the business if it couldraise more money that way.

"Today's announcement is the first major step in thedivestment of our Asian insurance and investment managementbusinesses and shows that ING continues to make steady progressin the restructuring of our company," said Jan Hommen, chiefexecutive, in a statement.

"AIA is an established player in Asia, and the combinationof our strong insurance operations with their longstanding trackrecord in Malaysia will create a market leader well positionedto benefit from the growth opportunities available in thecountry."

ING said it expects a net gain of about 780 million eurosfrom the transaction, which is expected to close in the firstquarter 2013 subject to regulatory approvals.

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, a s ource told Reuters earlier.

KB Financial Group is in advanced talks to buyING's South Korean operations, sources have told Reuters.($1 = 0.7751 euros)

(Reporting by Sara Webb; Editing by Gary Hill and CarolBishopric)

((sara.webb@thomsonreuters.com)(+31 20 504 5000)(ReutersMessaging: sara.webb.thomsonreuters.com@reuters.net))