UPDATE 1-Malaysia's RHB, AmBank to begin merger talks - sources

* Both banks seek trading suspension of shares on Thursday

* Banks receive central bank nod to commence talks - sources (Adds details of potential merger, background)

KUALA LUMPUR, May 31 (Reuters) - RHB Bank Bhd and AMMB Holdings Bhd (AmBank) will begin merger talks to create one of Malaysia’s biggest lenders, two sources familiar with the matter said on Wednesday.

The banks could announce as early as Thursday they have received approval from the central bank to commence merger negotiations, the sources said, speaking on condition of anonymity as the plans are private.

RHB, Malaysia’s fourth biggest bank, would be the acquirer in the potential merger, the sources said, adding the shareholding structure was still being worked out. AmBank is the country’s sixth biggest bank.

AmBank has a market capitalisation of 15.7 billion ringgit ($3.67 billion) and a complete takeover by RHB could be one of the biggest deals in Malaysia in recent years.

RHB and AmBank on Wednesday requested the national stock exchange suspend trading in their shares on Thursday, “pending a material announcement.”

AmBank declined to comment. An RHB spokeswoman said the company would make an official announcement in due course.

ANZ Banking Group, which owns a 24 percent stake in Ambank, has been weighing a sale of its stake since early last year, partly due to AmBank’s involvement in a political scandal linked to state fund 1Malaysia Development Berhad and Prime Minister Najib Razak, sources have said.

Najib has been buffeted by allegations of graft and financial mismanagement at 1MDB and in particular by revelations of the transfer of hundreds of millions of dollars into his AmBank accounts in 2013.

Najib has denied any wrongdoing and said he did not take any money for personal gain. 1MDB is the subject of money laundering investigations in at least six countries, including the United States, Singapore and Switzerland.

In 2015, AmBank was slapped with a 53.7 million ringgit fine by the Malaysian central bank for breaching certain financial regulations.

Deal activity in Malaysia has been subdued in recent years amid slowing economic growth and a slump in oil prices, and merger talks in the banking industry in particular have been unsuccessful.

In 2014-15, RHB, CIMB Holdings and Malaysian Building Society Bhd were in talks for a three-way $20 billion merger to create Malaysia’s largest bank. But the talks collapsed as the parties failed to agree on the terms.

Malaysian Building Society then entered into talks with Bank Muamalat Bhd for a merger that would have created the largest standalone Islamic bank in Malaysia, but the talks fell through. It is currently in merger talks with Asian Finance Bank Bhd.

$1 = 4.2790 ringgit Reporting by Liz Lee, Praveen Menon and A. Ananthalakshmi; Editing by Mark Potter