UPDATE 2-ING to sell Malaysian insurance unit to AIA for 1.3 bln euros

(Adds detail about AIA)

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."

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 fromNo. 4, unseating rival Prudential Plc , analysts said.

ING's Malaysia business sells life, general, and Islamicinsurance products and has about 1,200 employees and over 1.6million customers.

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 source 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)

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