UPDATE 1-ING clinches first Asia asset sale with AIA Malaysia deal -sources

* Announcement expected as early as Thursday

* Manulife, Richard Li still vying for other Asian units

* Deal to boost AIA's Malaysian ranking to No. 2

(Adds details of other Asian sales, background)

By Denny Thomas and Saeed Azhar

HONG KONG/SINGAPORE, Oct 10 (Reuters) - Pan-Asian insurer AIA Group Ltd has agreed to buy ING's Malaysian insurance unit and is expected to pay $1.5 billion to $1.7 billion, handing the Dutch financial services firm its first deal in a nine-month drive to sell off Asian assets.

A deal could be announced as early as Thursday, although last-minute regulatory hurdles could delay the signing of the agreement, sources familiar with the process told Reuters on Wednesday.

AIA was in the lead to buy both the Malaysian and Thai units of ING, sources familiar with the matter told Reuters in early September. However, ING is now bundling the Thai unit with its much larger Japan and Hong Kong operations and selling that group to another suitor, the sources said.

The AIA deal marks the first sale in an ING auction of Asian insurance operations announced in January, as part of a global asset sell-off to repay 10 billion euros ($12.9 billion) in state aid received during the 2008 global financial crisis.

The race to buy ING's Japan, Hong Kong and much smaller Thailand operations is still on, with Canada's Manulife Financial Corp and Hong Kong business tycoon Richard Li in the running, one of the sources said. KB Financial Group

is in advanced talks to buy ING's South Korean operations, sources have told Reuters.

ING originally had wanted to sell its entire Asia insurance operation, with a book value of 6.1 billion euros ($7.8 billion), to one buyer.

For AIA, the deal marks the second acquisition in less than one 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 from No. 4, unseating rival Prudential Plc , analysts said.

AIA shares are up 22 percent so far this year, outpacing a 13.4 percent rise in the Hong Kong financial subindex . Deutsche Bank and Morgan Stanley are advising AIA on the deal. ING is being advised by Goldman Sachs and J.P. Morgan.

The sources declined to be identified as the information has not yet been made public. ING, AIA, Manulife and a spokesman for Richard Li declined to comment.

($1 = 0.7754 euros)

(Additional reporting by Clare Baldwin; Editing by Michael Flaherty and Edmund Klamann)

((denny.thomas@thomsonreuters.com)(+852 2843 6358)(Reuters Messaging: denny.thomas.reuters.com@reuters.net))