* AIA sale talks reopened in late 2009 - source
* Sale hinges on Asia market performance - source
* Deal would end view of Pru as UK insurer - analyst
LONDON/HONG KONG Feb 28 (Reuters) - Prudential's (PRU.L) bid to buy American International Group's (AIG.N) Asian life unit is a bet against Asian stock markets as falling share prices across the region would make the alternative of listing the business in Hong Kong less attractive.
Prudential has been in on-again, off-again talks to buy the unit, American International Assurance (AIA), since early last year, with discussions resuming in late 2009, a source involved in the deal said on Sunday.
AIA embarked on its planned Hong Kong IPO last year, when the city's stock exchange was in the midst of the world's largest boom in initial public offerings as Asian markets surged in the second half of 2009, some as much 100 percent.
But so far this year, Asian markets have fallen, dragging down Hong Kong's IPO market, and opening the door for a buyer to swoop on a business seen as AIG's crown jewel.
"AIG is waiting for the markets, really," the source said, referring to the decision AIA's parent company faces: Sell AIA shares on Hong Kong's exchange should the market hold up, or sell the entire company to a strategic buyer if it continues to drop.
The Hong Kong stock exchange is expected to review AIA's IPO application in late March. The expected approval would clear the way for the offering to take place in April or May.
AIG is expected to pursue whichever option raises the most cash, with the proceeds earmarked towards repaying a $182.3 billion government bailout the company received two years ago.
A takeover of AIA by Prudential would make the company the biggest foreign insurer in Asia by far, further increasing its appeal to investors seeking exposure to one of the world's fastest-growing financial services markets.
"I think what it could do is finally put an end to the treatment of Prudential as a UK life company," said Sanford C. Bernstein analyst Toby Langley.
"I think that's something that's dragged on the stock for quite some time."
Buying AIA would increase the proportion of Prudential's profits generated in Asia to between two thirds and three quarters, from about half currently, Langley said.
The mooted deal with Prudential is worth about $35.5 billion, and the British insurer could finance the acquisition by issuing new shares, sources told Reuters on Saturday. [ID:nLDE61Q080]
Prudential has also held talks over selling its UK business to British insurance-focused takeover vehicle Resolution RSL.L if the AIA deal goes ahead, the Sunday Telegraph newspaper reported.
Prudential and Resolution both declined to comment.
Prudential has previously played down suggestions it might sell the UK unit, arguing that the business generates cash which can be reinvested in its faster-growing Asian and U.S. markets.
Analysts reckon Prudential's interest in AIA could prompt rival approaches, with Canada's Manulife Financial or France's Axa both seen as potentially interested because of their ambitions to grow in Asia.