* Abu Dhabi fund tried to sell Swiss private bank-sources
* Luxembourg's Banque Havilland among suitors - sources
* Talks with Banque Havilland ended in early May - sources
* Falcon's links to Malaysia's 1MDB main hurdle - sources
ZURICH/ABU DHABI/LONDON, May 11 (Reuters) - Abu Dhabi state investor Mubadala is struggling to sell its Swiss private bank, five sources told Reuters, as potential buyers are unwilling to pay up for a firm which is being investigated over alleged financial misconduct.
The business, Falcon Private Bank, is under investigation in Switzerland for allegedly failing to prevent suspected money laundering linked to 1MDB, the scandal-hit Malaysian state fund.
A spokesman for Falcon said the bank is cooperating with the Office of the Attorney General (OAG) of Switzerland which opened criminal proceedings against Falcon in 2016.
A previous probe by Singapore authorities over Falcon's involvement in the 1MDB scandal was concluded in 2016 and resulted in Falcon being stripped of its local banking licence.
Mubadala, which became the full owner of the bank last year, has been in talks with potential bidders including Luxembourg's Banque Havilland, three of the sources told Reuters.
Banque Havilland carried out due diligence on Falcon earlier this year but negotiations fell through in early May, the sources said, speaking on condition of anonymity.
Other players have also been invited to bid for the Zurich-based bank, which has about 10.5 billion Swiss francs ($10.5 billion) of assets under management and 13.1 billion francs of client assets, but none has made a firm offer amid fears of possible regulatory sanctions linked to the 1MDB scandal, the sources said.
"Anyone looking to do deals in wealth management in Europe has looked at Falcon but no one has the guts to go ahead and bid," said one of the sources, who has direct knowledge of the matter.
Mubadala declined to comment, while Banque Havilland was not immediately available for comment.
The Falcon spokesman said the bank was focused on developing its business "with the full support of our shareholder." He declined to comment on negotiations with Banque Havilland or other potential bidders.
A political storm has raged for almost three years in Malaysia over the 1MDB scandal, which is the focus of money laundering investigations in at least six countries, including Switzerland, Singapore and the United States.
Singapore authorities sentenced Falcon's former branch manager Jens Fred Sturzenegger to 28 weeks in jail in 2016 for failing to report suspicious transactions involving billions of dollars linked to 1MDB.
The Monetary Authority of Singapore also ordered the closure of Falcon's local branch because of "a persistent and severe lack of understanding" of Singapore's money-laundering controls.
Falcon said in 2016 it welcomed the completion of the Singapore's investigation over its involvement in the 1MDB case and while the withdrawal of its Singapore banking licence was "regrettable and disappointing," the decision would not impact the strategic development of the bank.
Mubadala inherited control of Falcon in 2017 after the merger of Mubadala Development Co with another Abu Dhabi state-owned fund, International Petroleum Investment Co (Ipic). Ipic's investment arm Aabar was previously in charge of Falcon.
Falcon provides financial services to private clients and wealthy families from its headquarters in Zurich and offices in London, Abu Dhabi and Dubai.
The sources said that while Banque Havilland and other potential bidders were demanding a big discount because of the reputational risk, Mubadala was not willing to compromise on Falcon's valuation.
"Mubadala found the price offered unappealing. It will sell only if it gets the right price," one of the sources said.
Private banks are typically valued by investment bankers at between one and three times their book value but such metrics would not apply if the assets carry regulatory risk.
($1 = 0.9993 Swiss francs) (Additional reporting By Saeed Azhar; Editing by Mark Potter)