A former Taiwanese diplomat who says he wants to save American International Group's Taiwan unit from being bought by a Chinese firm is lining up a $2.5 billion bid with Japanese and Middle Eastern money.

Wang Shih-jung, a 71-year old policyholder of AIG's Nan Shan unit and a former trade representative for Taiwan in Switzerland, told Reuters he has set up a company to make a bid if an existing $2.2 billion bid from a China-based firm is rejected by Taiwan regulators.

Our stepping out is the only way for AIG to fix this difficult problem, to help the Taiwan government resolve this tough issue and to prevent the two Hong Kong vultures from taking over Nan Shan, Wang said in a telephone interview.

AIG's $2.2 billion sale of Nan Shan to battery maker China Strategic <0235.HK> and Hong Kong investment fund Primus has stalled since October amid concern the buyers are backed by mainland Chinese money and lack both experience in the insurance business and the ability to raise funds for future operations.

Taiwan's Financial Supervisory Commission has started a final review of the bid and could make a decision as soon as next month.

The possible involvement of former political foe China in particular has stirred controversy in Taiwan, where Nan Shan insures almost one-sixth of the self-ruled island's population. Politicians, labor unions and some policyholders have voiced strong opposition to the deal.

Wang said $900 million of the bid cost would come from Japanese investors, $1.25 billion from a Qatari fund and the rest from Taiwanese banks.

The names of the investors would be disclosed when the funding is finalized, but Wang said they included a venture capital firm related to Dai-ichi Mutual Life <8750.T>, Japan's No.2 life insurer, and a Tokyo-based firm called Firix Partners.

AIG said in an emailed statement via its Taiwan public relations firm that it does not comment on rumor or speculation, and we are committed to closing signed sale agreement with Primus Financial/CSH and remain confident that the transaction, based on its merits, will be approved.

It has previously said it would not entertain any other bids.

Dai-ichi Mutual was not immediately available for comment.

We've talked to AIG several times, Wang said. We told them we could get the money ready and deliver it the day after if regulators reject the China Strategic bid.

Taiwanese bank Chinatrust Holdings <2891.TW> has also said it would bid for Nan Shan if the current deal fell through.

(Reporting by Rachel Lee and Faith Hung in Taipei and Junko Fujita in Tokyo; writing by Jonathan Standing; Editing by Ken Wills and Muralikumar Anantharaman)