Prudential
, Britain's largest insurer, is in advanced talks to buy the Asian arm of American International Group in a deal worth about $35.5 billion, sources familiar with the matter said on Saturday.

The talks are going on as AIG, which is trying to pay back the U.S. government after a $182.3 billion taxpayer-funded rescue, also moves ahead on its plan for an initial public offering for the unit, American International Assurance (AIA), the sources said.

A Hong Kong IPO for the unit is expected to raise more than $10 billion, depending on the size of the stake that is sold.

Financing for the bid could include a share issue by Pru, the sources said.

One of the sources said Pru Chief Executive Tidjane Thiam, appointed to the top job a year ago, held talks with AIG executives in New York last week. Pru could issue a statement to the market as early as Monday.

A deal with Pru would be one of the largest overseas deals to date for a British firm and make the UK company one of the biggest insurers in Asia.

Pru operates in 13 Asian markets where it has more than 11 million life customers. Asia, which accounted for 44 percent of Pru's profits in 2008, is also seen as the engine of the group's future growth.

It would also help AIG make a significant dent in its outstanding bill from the government, which owns nearly 80 percent of the insurer and has a $16 billion preferred interest in a special purpose vehicle that holds AIA.

AIG is also in advanced talks to sell another large foreign life insurance unit, American Life Insurance Co, to MetLife Inc in a roughly $15 billion deal. Those talks hinge on a tax issue that the two sides are trying to resolve.

AIG posted a quarterly loss of $8.9 billion on Friday, as it struggles to find its feet more than a year after September 2008 rescue.

The sources did not confirm earlier reports by Britain's Sky News that the cash call could aim to raise as much as 15 billion pounds ($22.8 billion), making it one of the largest UK rights issues to date.

Pru and AIG declined to comment.

CROWN JEWEL

Hong Kong-based AIA is regarded as AIG's Asian crown jewel, a 90-year-old business that manages more than $60 billion of assets and provides coverage to about 20 million customers, or close to a third of AIG's total customer base.

Expectations for the value of an AIA IPO have ballooned from around $5 billion a year ago, as Hong Kong and China's stock markets surged in the second half, boosting valuations of the region's insurance companies with them.

But selling IPOs there is getting tougher as investors have a choice of other offerings.

A bid for a company as it prepares to go public is not unusual, as it saves the potential buyer from having to contend with an equity market valuation. MetLife jumped in with an offer for Alico as AIG prepared to take the IPO route for that unit as well, although the AIA IPO plans are more advanced.

Sources familiar with the matter said a year ago that Prudential had made a preliminary offer for AIA, but its modest price fell short of the seller's expectations.

At the time, AIG had wanted between $20 billion and $40 billion for AIA, depending on the size of the stake to be sold.

AIG Chief Executive Robert Benmosche envisions a smaller AIG in the future, with global property-casualty and U.S. life and annuity operations at its core.

AIG has announced more than two dozen deals to sell assets for more than $11.9 billion.

(Editing by Ron Askew and Stacey Joyce)