* Asset sales possible to strengthen capital position
* Considering sale of pension unit, insurance business
* Other options also explored, no details given
* Net inflow of deposits seen in 2012
* Shares drop as much as 23 percent (Recasts, adds company, analyst quotes)
AMSTERDAM, July 13 (Reuters) - Dutch financial services group SNS Reaal, struggling with a loss-making property arm and facing the repayment of state aid by the end of next year, said it was considering the sale of its insurance business, one of its main cash generators.
SNS Reaal has been hit by a weak property market and low interest rates. It is looking at options including the sale of its insurance unit Reaal and its pension operation Zwitserleven to strengthen its capital position, and will continue to wind down its property finance loans, a spokesman told Reuters.
Its shares plunged as much as 23 percent to hit the lowest level in a month, bringing the decline year-to-date to 43 percent.
Selling by retail and institutional investors was driven partly by fears that SNS Reaal will struggle to fetch a high price for its insurance business.
"It's a fire sale, this isn't good," said one trader who asked not to be named, adding that Rabobank's downgrade of the stock from "buy" to "reduce" also hurt sentiment.
The Netherlands' fourth-largest bank needed 750 million euros ($914 million) of Dutch state aid in 2008 and has struggled to revive its loss-making property division, which has recorded more than 1 billion euros in net losses since 2009.
"We are in a constant dialogue with the Dutch central bank and the ministry of finance and have been since 2008," a spokesman told Reuters, adding that these included talks about the need to repay state aid as well as the current low interest rate environment which has hit its insurance unit.
ING analyst Maarten Altena said SNS Reaal needed to raise at least 1.6 billion euros to repay the state and fund a capital shortfall, but that it would be very difficult to achieve that from selling its insurance and pension businesses.
Rabobank warned in a research note that it could take time to pull off such asset sales.
"Until now the outlook was that at least the cash flow of the insurer could every year be used to redeem holding debt and transfer capital to the bank," Rabobank said.
"By selling the insurer this is not possible any more. During this time SNS has a bank to run, and this uncertainty is not helpful for the operations. This negative feedback loop can feed on itself," Rabobank said.
In May, SNS Reaal said that meeting the deadline to repay the state had become more difficult because of economic uncertainty and capital demands.
That deadline can be extended but could lead to further constraints being imposed by the European Commission, it said.
Several Dutch banks and insurers had to be rescued during the 2008 financial crisis. In 2009, a small lender called DSB went bankrupt, hit by a liquidity crunch when clients panicked and withdrew about one-sixth of the group's deposits - memories that are still fresh in the Netherlands.
However, SNS Reaal said that it has so far seen a steady net inflow of deposits from retail investors this year, rising 1.5 billion euros to 31.8 billion euros in the first quarter and continuing to rise during the second quarter.
In the wake of the 2008 financial crisis, the Netherlands decided to set up a new bank guarantee fund but its introduction has been postponed. Deposits are currently covered up to the amount of 100,000 euros.
Dutch daily Het Financieele Dagblad, citing unnamed sources, reported SNS Reaal had asked Goldman Sachs to study various options to raise cash, while the finance ministry has hired Morgan Stanley to advise on the bank's options, in case SNS Reaal is unable to fully repay the state aid by the deadline of the end of 2013.
Dutch insurers Delta Lloyd, Aegon, and privately-owned Achmea, as well as German insurer Allianz are expected to be interested in some of SNS Reaal operations, including its pension activities, the paper said.
The finance ministry declined to comment on SNS Reaal. ($1=0.8208 euros) (Editing by Jon Loades-Carter)