* Cites worries about the quality of the business
* Withdrawal further hurts chances for auction of unit
* AIG valued unit at up to $40 billion - sources (Adds details about valuation, background)
BEIJING - China Life has withdrawn from the bidding for American International Group Inc's Asian unit due to worries about the quality of the business, the Chinese insurer's chairman said on Tuesday.
The withdrawal further dashes hopes for an auction of the unit, American International Assurance Co (AIA), which AIG has struggled to sell amid challenging capital markets and worsening economic conditions.
We are no longer bidding for AIA. AIA's asset quality, business direction and brand have all changed, China Life (601628.SS) Chairman Yang Chao told reporters before a meeting of a parliamentary advisory body in Beijing.
AIG had no comment on the matter.
Hopes for a bid by China Life were rekindled last week 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, which is trying to sell assets to pay back the U.S. government after a massive rescue, aimed 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 on 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. The deadline for bids expired last Friday.
AIG plans to put AIA and American Life Insurance Co, another large foreign life insurance 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 preferred shares in these operations.
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.
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. (Additional reporting by Victoria Howley and Daisy Ku in London and Paritosh Bansal in New York; Editing by Nick Macfie and John Wallace)