UPDATE 2-Australia's QBE scraps $8.4 bln bid for IAG

(Adds fund manager comments)

By Sonali Paul

MELBOURNE, May 21 (Reuters) - QBE Insurance Ltd (QBE.AX)
dropped its A$8.7 billion ($8.4 billion) bid proposal for rival
Insurance Australia Group Ltd (IAG.AX) after IAG rejected it as
too low, triggering an 8 percent slide in IAG's shares.

Analysts said there was nothing to stop QBE returning with
another offer at some time as it had not made a formal bid.

"I'm sure they're not closing the book on it," said Rob
Patterson, managing director of Argo Investments, which owns
shares in both IAG and QBE.

That was the market's reading as IAG's shares did not fall
as far as might have been expected in the wake of a profit
downgrade last month.

IAG, Australia's top home and car insurer, said late on
Tuesday that QBE's sweetened offer, pitched at a 10 percent
premium to IAG's share price before their deal discussions were
announced last month, was still too low.

QBE raised its bid by 6 percent this week to 0.145 QBE
shares and A$0.90 cash for each IAG share, looking to secure a
board recommendation on what it called its final offer.

"QBE understands its final proposal on price was well short
of IAG's expectations," QBE said on Wednesday in a statement
withdrawing its proposal to take over IAG.

It said the relatively low premium was justified in light
of IAG's falling profits over the past three years and a profit
downgrade last month.

Analysts expect IAG, which controls about one-third of
Australia's general insurance market, to report a 55 percent
drop in profit this year.

IAG shares fell to a near 6-week low of A$3.88, and last
traded down 6.2 percent at A$3.97, the high end of where they
were trading in the three months leading up to QBE's first
approach in April.

QBE shares fell 1.3 percent to A$25.33 in a broader market
.AXJO that was down 1 percent.
"The market's still seeing some probability they might come
back," said Karara Capital investment manager Rohan Walsh.

QBE, which focuses on commercial insurance, said it would
now turn to other acquisition opportunities in the Americas,
Europe, Asia and Australia.

"Given tougher financial markets and some pressures the
international insurers are under, you'd probably suspect that
the availability of acquisition targets might have increased
over recent months," Walsh said.

But analysts consider it unlikely QBE would come back with
a hostile bid as nearly half of IAG's shares are owned by
retail investors who would follow the board's recommendation.

"That's not to say they won't keep talking or bide their
time to wait for another possible downgrade," said Argo's
Patterson.
($1=A$1.04)
(Reporting by Sonali Paul, Editing by Ian Geoghegan)