UPDATE 1-AIG says to pursue NY IPO for life insurance unit

* AIG splitting off unit ahead of New York share sale

* AIG still in talks with MetLife over possible Alico sale

* Spinning off unit step to repay $83 bln in govt debt
(Updates with details from AIG statement, comments by source,
other background, share price)

NEW YORK, July 15 (Reuters) - American International Group
Inc (AIG.N) said on Wednesday it was moving ahead with spinning
off a large life insurance unit, even as a source said it
continues to hold sales talks with MetLife Inc.

AIG said it is splitting off American Life Insurance
Company, or Alico, in anticipation of a public sale of shares
in New York.

AIG last month began the process of splitting the company
off into a new holding company, paving the way for the Federal
Reserve Bank of New York to take a $9 billion preferred stake.

The Fed and U.S. Treasury have together loaned AIG roughly
$83 billion since last September as part of a larger federal
rescue that saved what was once the world's largest insurer
from bankruptcy. AIG nearly crumbled after big derivatives bets
left it more than $99 billion in the red last year.

By giving the Fed preferred stakes in Alico and another
large life insurance unit, American International Assurance Co
Ltd (AIA), AIG could reduce its government debt by up to $26
billion.

AIG said an initial public offering of Alico would be
subject to market conditions. It also is still in talks with
No. 1 U.S. life insurer MetLife Inc (MET.N), which is
interested in buying the division, according to the source.

"We continue to consider all strategic options through a
robust, structured and disciplined process," said CEO Edward
Liddy, in the statement. Alico sells life insurance and
retirement products to 19 million customers through a
distribution network that includes 40,000 agents.

Alico operates in 54 countries but generates more than half
its revenue in Japan. MetLife CEO Robert Henrikson said in late
May the company was eager to expand in Japan, and may seek to
do so through acquisitions.

AIG was also in talks with a Prudential Financial (PRU.N)
unit to sell two smaller Japanese life insurers, according to a
person familiar with the matter.

AIG has been trying to sell off prized assets to pay down
its taxpayer debt.

Separately, boutique investment bank Perella Weinberg
Partners LP has joined a consortium bidding for another AIG
unit up for sale, its asset management unit, a source said on
Wednesday. The news was first reported by the Deal Pipeline.

AIG shares dropped 10 cents or 0.7 percent to close at
$14.22 on the New York Stock Exchange on Wednesday. Prudential
shares were up 5.7 percent at $39.45. MetLife shares gained 5.5
percent to close at $30.90.
(Reporting by Lilla Zuill and Paritosh Bansal, editing by
Matthew Lewis)