American International Group Inc's board approved the sale of its Asian life insurance business to Britain's Prudential Plc
for $35.5 billion, a source familiar with the matter said on Sunday.

Prudential, Britain's largest insurer, will pay about $25 billion in cash and the rest in equity, which could include preferred stock, for AIG's American International Assurance (AIA), the source said, declining to be identified because the deal is not public yet.

A deal, in what would be the largest asset sale for insurer AIG, could be announced as soon as Monday, the source said.

Prudential declined to comment. AIG was not immediately available.

AIG, which is nearly 80 percent owned by the U.S. government and is trying to pay back taxpayers after a $182.3 billion bailout, had been planning an initial public offering for AIA in Hong Kong, when Prudential jumped in with an offer.

It would be one of the largest overseas deals to date for a British firm and make Prudential one of the biggest insurers in Asia.

Prudential operates in 13 Asian markets where it has more than 11 million life customers. Asia, which accounted for 44 percent of Pru's profits in 2008, is also seen as the engine of the group's future growth.

It would also help AIG make a significant dent in its outstanding bill from the U.S. government, which has a $16 billion preferred interest in a special purpose vehicle that holds AIA.

AIG is also in advanced talks to sell another large foreign life insurance unit, American Life Insurance Co, to MetLife Inc in a roughly $15 billion deal. Those talks hinge on a tax issue that the two sides are trying to resolve.

So far, AIG has announced more than two dozen deals to sell assets for over $11.9 billion.

(Editing by Leslie Adler)