Prudential and Manulife Financial made preliminary offers for American International Group's Asian unit, but Prudential's offer fell short for what AIG wants for the business, sources familiar with the matter said.

Chinese insurer China Life Insurance, which was seen as another large potential bidder, pulled out of the auction for the unit, American International Assurance Co (AIA), on worries about the quality of the business, a company official said on Tuesday.

We are no longer bidding for AIA. AIA's asset quality, business direction and brand have all changed, China Life Chairman Yang Chao said.

Prudential offered a modest price, but its expression of interest did not meet the seller's pricing expectations, a person familiar with the matter said.

The status of Manulife's bid was not immediately known. AIG, Prudential and Manulife all declined to comment.

AIG, which is trying to sell assets to pay back the U.S. government after a massive rescue, wants to sell the business for between $20 billion and $40 billion, depending on the size of the stake sold, people close to two parties that have looked at AIA have told Reuters.

AIG said Monday it had received preliminary proposals for all or part of AIA, and was also considering a full or partial initial public offering for the unit after a deadline for bids expired last Friday.

At the same time, the insurer plans to put AIA and American Life Insurance -- another large foreign life business it has been trying to sell -- in trusts and give the U.S. government preferred ownership interest in them.

The insurer hopes to reduce the outstanding balance of a Federal Reserve credit line by up to $26 billion in return for the preferred shares in these operations.

Tough Sale

Plans to sell up to 49 percent of AIA, considered AIG's crown jewel in Asia, were first put in place last fall, shortly after the U.S. government saved AIG from collapse. But the company has since indicated it would be willing to sell the entire unit for the right price.

The auction has faltered as potential buyers deal with their own problems amid challenging capital markets and worsening global economic conditions.

Reuters reported previously that hopes for a sale were pinned on Prudential, Manulife and the Singapore sovereign wealth fund Temasek Holdings.

Late last week, hopes for a bid by China Life were also rekindled after the vice chairman of the China Insurance Regulatory Commission said Chinese firms would decide on purely commercial grounds whether to bid for AIA.

Vice Chairman Li Kemu also said the regulator had a favorable view of AIA assets, especially in China and Hong Kong.

AIG posted a record quarterly loss of $61.7 billion on Monday and said the government had agreed to revise its bailout package, giving the company access to a new $30 billion equity commitment. Officials concluded that letting the insurer fail would imperil the world financial system.

AIG's shares ended up 1 cent to 43 cents on the New York Stock Exchange.