American International Group Inc said on Wednesday it was moving ahead with spinning off a large life insurance unit, even as a source said it continues to hold sales talks with MetLife Inc.

AIG said it is splitting off American Life Insurance Company, or Alico, in anticipation of a public sale of shares in New York.

AIG last month began the process of splitting the company off into a new holding company, paving the way for the Federal Reserve Bank of New York to take a $9 billion preferred stake.

The Fed and U.S. Treasury have together loaned AIG roughly $83 billion since last September as part of a larger federal rescue that saved what was once the world's largest insurer from bankruptcy. AIG nearly crumbled after big derivatives bets left it more than $99 billion in the red last year.

By giving the Fed preferred stakes in Alico and another large life insurance unit, American International Assurance Co Ltd (AIA), AIG could reduce its government debt by up to $26 billion.

AIG said an initial public offering of Alico would be subject to market conditions. It also is still in talks with No. 1 U.S. life insurer MetLife Inc (MET.N), which is interested in buying the division, according to the source.

We continue to consider all strategic options through a robust, structured and disciplined process, said CEO Edward Liddy, in the statement. Alico sells life insurance and retirement products to 19 million customers through a distribution network that includes 40,000 agents.

Alico operates in 54 countries but generates more than half its revenue in Japan. MetLife CEO Robert Henrikson said in late May the company was eager to expand in Japan, and may seek to do so through acquisitions.

AIG was also in talks with a Prudential Financial (PRU.N) unit to sell two smaller Japanese life insurers, according to a person familiar with the matter.

AIG has been trying to sell off prized assets to pay down its taxpayer debt.

Separately, boutique investment bank Perella Weinberg Partners LP has joined a consortium bidding for another AIG unit up for sale, its asset management unit, a source said on Wednesday. The news was first reported by the Deal Pipeline.

AIG shares dropped 10 cents or 0.7 percent to close at $14.22 on the New York Stock Exchange on Wednesday. Prudential shares were up 5.7 percent at $39.45. MetLife shares gained 5.5 percent to close at $30.90.

(Reporting by Lilla Zuill and Paritosh Bansal, editing by Matthew Lewis)