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 has agreed to sell its Malaysian insurance unit to pan-Asian insurer AIA Group Ltd for 1.3 billion euros ($1.68 billion) in cash, kicking off the Dutch group's long-awaited divestment of Asian assets.

The deal, which confirmed a report by Reuters earlier on Wednesday, 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 in state aid received during the 2008 global financial crisis.

ING originally wanted to sell its entire Asia insurance operation, with a book value of 6.1 billion euros, to one buyer but had said it was willing to split up the business if it could raise more money that way.

"Today's announcement is the first major step in the divestment of our Asian insurance and investment management businesses and shows that ING continues to make steady progress in the restructuring of our company," said Jan Hommen, chief executive, in a statement.

"AIA is an established player in Asia, and the combination of our strong insurance operations with their longstanding track record in Malaysia will create a market leader well positioned to benefit from the growth opportunities available in the country."

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.

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

ING said it expects a net gain of about 780 million euros from the transaction, which is expected to close in the first quarter 2013 subject to regulatory approvals.

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, a source told Reuters earlier.

KB Financial Group is in advanced talks to buy ING's South Korean operations, sources have told Reuters. ($1 = 0.7751 euros)

(Reporting by Sara Webb; Editing by Gary Hill and Carol Bishopric)

((sara.webb@thomsonreuters.com)(+31 20 504 5000)(Reuters Messaging: sara.webb.thomsonreuters.com@reuters.net))