* Korean Air drops bid, deems current share price too high
* Two or more bids needed for valid gov't stake sale
* Latest in stalled divestments by Lee gov't
By Joyce Lee
SEOUL, Dec 17 (Reuters) - The sale of an estimated $1.1 billion stake in Korea Aerospace Industries (KAI), the country's sole aircraft maker, was cast in doubt after Korean Air pulled out of negotiations, marring the privatisation efforts of the outgoing administration.
The stake in KAI held by Korea Finance Corp and other shareholders was among a number of assets that the outgoing administration of President Lee Myung-bak has attempted to sell. Had the deal been successful, it would have been be one of the few South Korean stake sales expected to fetch more than 1 trillion won this year.
Korean Air Lines Co Ltd, which submitted an initial bid in September and participated in the due diligence process that ended Dec. 7, did not submit a bid, a spokesman for the airline said on Monday.
Hyundai Heavy Industries Co Ltd submitted the sole binding bid for the 41.75 percent stake, Korea Finance Corp, KAI's largest shareholder, said in a press release.
As the stake includes the holdings of a government-run company, the sale is subject to South Korean rules which stipulate that a government stake auction must have two or more bidders to be valid.
Korea Finance Corp said future proceedings concerning the KAI stake will be decided after discussions with KAI's shareholders.
Korean Air said in a statement that after due diligence, the airline decided to drop its bid as it deemed the market value of KAI shares "unsuitable."
Korea Finance Corp and other KAI shareholders had maintained they would not accept a bid price under the current trading price.
Shares in KAI closed 3.1 percent higher at 26,700 won ahead of the company press releases, outperfoming the wider market .
"The law makes it clear a government stake must be sold above a 'reasonable' price, of which the recent weighted market value is a key factor," a Korea Finance Corp official directly overseeing the sale previously told Reuters.
The offered stake is worth 1.1 trillion won ($1.02 billion) as of Monday's closing price, excluding management premium.
Korean Air's pullout confirmed media speculation that at least one bidder might not participate after both strong candidates for the South Korean presidential election to be held on Wednesday expressed concerns over the sale.
In a televised debate on Sunday, main opposition candidate Moon Jae-in criticised the current administration's attempt to privatise KAI, while conservative candidate Park Geun-hye expressed the need for caution in privatising the aircraft maker.
Other government divestments that have failed or stalled include the attempt to sell the $5.2 billion controlling stake in Woori Finance Holdings and the initial offering of an up to $5.3 billion stake in KDB Financial Group.
KAI's sale attempt had been plagued with uncertainty, including a postponement of binding bid deadlines when protests by KAI's labour union blocked access to KAI's files when the bidders were conducting their due diligence.
Credit Suisse and Korea Development Bank were the lead managers for the sale. ($1 = 1074.7500 Korean won) (Reporting by Joyce Lee; Editing by Ryan Woo)