China's largest online game firm Shanda Interactive plans to raise as much as $800 million in a U.S. IPO for its games unit, to help it monetise its core business as it seeks to become a diversified media company.

The move to tap markets comes as investor interest is increasing for China's fast-growing online game business, backed by the world's largest pool of Internet users.

Shanda produces Legend of Mir - a popular multi-player online role playing game and also operates Aion in China's Internet market, home to more than 300 million users.

Sales in China's online game market are set to rise 30 to 50 percent this year to 24-27 billion yuan ($3.5-$3.9 billion). The industry is crowded with a number of Nasdaq-listed firms, including NetEase, The9  and Giant Interactive.

The filing comes after Chinese Internet portal Sohu.com unit took its gaming unit, Changyou.com Ltd, public in a $138 million IPO on Nasdaq in April.

Shanda founder Chen Tianqiao has said in the past he would like to ultimately transform his company into a diversified media firm, taking it away from its roots as a gaming company.

But analysts questioned the move to spin off its most lucrative unit, saying it could lead to share dilution.

Everyone is scratching their head as to why they want to spin out this unit that gives them 95 percent of their revenue. It's their crown jewel, said James Lee an analyst with Sterne Agee Leech.

There's still a lot of convincing to do in my opinion, he added, noting that Shanda, with its strong net cash position, did not need additional cash from the IPO.

Shand said it will use the IPO proceeds to fund acquisitions and joint ventures, as well as for capital expenditure.

Online games and casual games contributed nearly 96 percent to Shanda's total revenue in April-June. On Thursday, the firm reported a 53 percent rise in second quarter net profit. Besides games, Shanda also has an online literature business.

Eager to grab a slice of the growing market and stay ahead of the pack, game developers and operators are under pressure to churn out new titles and expansion packs to keep interest bubbling among China's 50 million online gamers.

After spinning off gaming, what is left in the company is very little, long term there is potential for their literature business but in the near term, I don't think it can be monetized that easily, said Bagga.

As of Aug. 31, Shanda Games operated 18 multiplayer role playing games and 11 advanced casual games, with 16 more role playing games and eight advanced casual games more expected.

Shares of online gaming firms are market favourites. Changyou.com shares have surged about 140 percent from their IPO price, making the stock the strongest performing IPO of 2009.

Shanda's prospectus did not indicate when the IPO might be priced or whether it would include shares in addition to those being sold.

Shanda Games had about 9.7 million active paying accounts for the quarter ended June 30, according to its prospectus.

Shanda Games has applied to list its American depositary shares on Nasdaq under the symbol GAME.

Goldman Sachs and J.P. Morgan are the lead underwriters.

(Additional reporting by Alexei Oreskovic in San Francisco; Editing by Anshuman Daga)