TAIPEI - American International Group's stalled $2.2 billion sale of its Taiwan unit to a group led by China Strategic faces a new hurdle after Taiwan's regulator sought talks with parliament over the deal, raising the prospect of a chill in the nascent cross-strait M&A market.

AIG agreed to sell Nan Shan to China Strategic and Hong Kong-based financial services firm Primus Financial in October, but has not been able to close the deal on concerns in Taiwan the buyers were backed by China-sourced funds.

Taiwan's foreign investment regulator said it wants talks with parliament in March about the stalled sale -- AIG's largest since a U.S. government bailout -- and analysts said it was unlikely the buyers could meet the late June completion deadline for the deal.

Any rejection of the (Nan Shan) deal would mean Chinese investors would not want to buy Taiwanese financial firms, at least not this year, said a Taipei-based banking analyst at a European securities house.

Relations between Taiwan and China, political foes for decades, have improved since Taiwanese President Ma Ying-jeou took office in 2008. However, the island remains reluctant to fully open industries such as financial services and telecoms to Chinese investors.

There have been few deals like Nan Shan that have to go through the legislature, said the analyst, who asked not to be identified due to the sensitive nature of the matter.

It puts lots of uncertainty on the sale and it could mean China Strategic would not be able to make the deadline (in June), he said.

Analyst Michael Lan of Fubon Financial's brokerage arm said: China Strategic wants to control Nan Shan instead of getting a strategic stake, which is why the government is putting a tight grip on the deal.

An earlier deal by China Mobile to buy a 12 percent stake for $529 million in Taiwanese mobile carrier FarEastone has also been stalled since it was announced in April, as the Taiwan government would not examine the plan, which is technically not allowed under current laws.

BATTERIES TO INSURANCE

China Strategic was a $111 million holding company known for making batteries until it made its bid for Nan Shan, Taiwan's No.3 life insurer by market share with more than 4 million policy holders.

The bid raised concern among Taiwanese politicians about the mainland's intentions towards Taiwan, which Beijing views as a renegade province.

That put pressure on Ma not to appear too close to China even as it offered stronger business ties to help the Taiwan economy weather the global downturn.

We are trying to set up a special session to talk to the Legislative Yuan. The soonest would be in March, Fan Liang-tung, executive secretary of the Investment Commission, told Reuters on Tuesday, referring to Taiwan's parliament.

We have great doubts about China Strategic being an appropriate investor for Nan Shan, Fan said.

China Strategic was not available for comment, while Primus declined comment.

Fan's comments reflected previous ones made by Taiwan's top financial regulator, the Financial Supervisory Commission (FSC), which said in November it would not make a decision on the sale in the short term as many questions need to be answered.

The FSC will have the final say over the fate of the Nan Shan deal, after the investment commission completes its scrutiny.

In December, Robert Morse, chairman and CEO of Hong Kong-based Primus told Reuters that none of the money backing the acquisition of Nan Shan was sourced from mainland China and that he would reassure Taiwan regulators on that issue.

As the deadline for the Nan Shan deal looms in late June, the Investment Commission sees mounting pressure on China Strategic.

The closer it gets to June, the more it would go against China Strategic, the Investment Commission's Fan said. If the sale flops, AIG may ask more for Nan Shan next time. ($1 = T$32.0) (Additional reporting by Kelvin Soh; Editing by Jonathan Standing and Anshuman Daga)

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