UPDATE 2-Tarnished Australian wealth manager AMP sells life insurance arm at discount

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* AMP sells life business below book value for A$3.3 bln

* Cash streams out of Australian managed funds

* Shares hit 15-year low (Adds background on inquiry, cash flow figures, CEO comment)

SYDNEY, Oct 25 (Reuters) - Australia largest wealth manager, AMP Ltd, said on Thursday it would sell its life insurance arm at a discount and its funds were haemorrhaging cash, as it struggles to rebuild its reputation following revelations of systemic wrongdoing.

The company said it would offload its life insurance and wealth protection business to British Resolution Life for A$3.3 billion ($2.3 billion) - almost a fifth below book value - and sell part of its New Zealand wealth protection businesses in an initial public offering.

It also revealed a sharp rise in client withdrawals from its Australian wealth management division in the three months to September, after it admitted in a public inquiry to charging thousands of customers for advice they never received.

Taken together, it underscores the depth of the financial problems now facing the 170-year-old stalwart of Australian finance, the highest profile casualty from the ongoing government-ordered inquiry which has revealed malpractice and poor governance across the industry.

"This is all very messy, it will take the market a while to digest this," said David Walker, an analyst at Clime Asset Management, adding that in the current climate the insurance price could have been even lower.

"It's a motivated seller. It'll never rerate again until they get rid of this stuff ... the life insurance has been an awful business."

AMP shares fell nearly 10 percent to a 15-year low as the broader market dropped 2 percent, and have shed 43 percent since the inquiry began in February.

The wealth manager, which had flagged business sales as part of a portfolio review months ago, said London-based Resolution Life would pay A$1.9 billion in cash for AMP's life insurance business, with another A$1.1 billion in non-cash considerations.

Separately, AMP has reinsured its New Zealand income protection business and said it planned to float its New Zealand wealth management business.

LOSING CLIENTS

AMP said client withdrawals from its tarnished Australian wealth management division soared to about A$1.5 billion in the third quarter, from A$243 million in the second, after its shocking admissions to the powerful Royal Commission of inquiry.

The division had total assets under management of A$132.6 billion at the end of the quarter.

The inquiry heard the company had charged thousands of customers for financial advice it never gave, then doctored a supposedly independent report to the corporate regulator about it, which could lead to criminal charges.

Seven senior officials, including the chairman and chief executive, have now left the firm and its business model of licensing external advisers to distribute products is under extreme pressure.

Incoming Chief Executive Francesco De Ferrari, hired from Credit Suisse, begins on Dec. 1 and the company reports annual results on Feb. 14.

($1 = 1.4148 Australian dollars) (Reporting by Tom Westbrook in SYDNEY and Rushil Dutta and Nikhil Kurian Nainan in BENGALURU; Editing by Stephen Coates)