UPDATE 1-Malaysia's AirAsia sells aircraft portfolio for $1.2 bln

* The sale raises $902 mln cash

* AirAsia expects to recognise gains of $246 mln on the sale

* AirAsia says has now disposed most of physical non-core assets (Adds details of deal)

KUALA LUMPUR, March 1 (Reuters) - AirAsia Bhd, Malaysia's flagship budget airline, said on Thursday it has agreed to sell its aircraft leasing operations for $1.2 billion to firms managed by BBAM Limited Partnership.

The sale is part of AirAsia's efforts to sell non-core assets and will allow it to cut debt while ridding itself of the financial commitment of owning aircraft.

The sale raises approximately $902 million of cash proceeds and gives AirAsia's unit, Asia Aviation Capital Ltd, an enterprise value of $2.85 billion.

Fly Leasing Ltd, Incline B Aviation Ltd Partnership and Nomura Babcock and Brown will acquire a portfolio of 84 aircraft and 14 engines of which 79 aircraft and 14 engines will be leased back to AirAsia and its affiliates.

As part of the deal, AirAsia will also take a 10.2 percent stake in Fly, valued at $50 million.

AirAsia is expected to recognise a gain of approximately 967.1 million ringgit ($246 million) as a result of the leasing unit sale, AirAsia said in a statement.

AirAsia Group CEO Tony Fernandes said the deal was in line with the group's strategy of disposing non-core assets and businesses, to focus on digital businesses.

"We have now disposed of most of our physical non-core assets and we are thrilled to be embarking on our new digital strategy which will build a very valuable group of assets," he said.

AirAsia has sold its training centre as well as a ground handling unit in the last six months.

AirAsia halted trading for the first half session on Thursday. ($1 = 3.9275 ringgit) (Reporting by Liz Lee; Writing by Praveen Menon; Editing by Edwina Gibbs)