LONDON - British insurer Prudential PLC said Monday it will buy the Asian unit of bailed out American International Group Inc. in a deal worth $35.5 billion that will allow AIG to pay back some of the money it owes U.S. taxpayers.

AIG, which was kept alive by a $182.5 billion rescue by the U.S. government in September 2008, will get $25 billion in cash - $20 billion of that from a Prudential rights issue - and $10.5 billion in new shares and securities for the sale of AIA Group Ltd.

The combined group will be the leading life insurer in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines, as well as the biggest foreign life insurer in China and India, Prudential said.

AIG said it would use cash from the sale to redeem $16 billion worth of preferred interests held by the Federal Reserve Bank of New York and to repay about $9 billion to a Fed credit facility. Prudential securities would be sold over time to make additional payments on debt, AIG said.

In selling to Prudential, AIG scrapped an earlier plan for an initial public offering of AIA.

"We decided that a sale to Prudential enables AIG to realize value on a faster track to repay U.S. taxpayers," said AIG President and CEO Bob Benmosche.

"This transaction, the most significant milestone to date in our ongoing effort to repay taxpayers, also gives us greater flexibility to move forward with AIG's restructuring and focus on enhancing the value of our key insurance businesses, which will benefit all stakeholders."

AIG shares were up 12 percent at $28.26 in pre-opening trading on the New York Stock Exchange.

Shares in Prudential PLC - which is not connected to Prudential Financial Inc., based in Newark, N.J. - fell 11.5 percent to 533.5 pence by midday on the London Stock Exchange following the announcement.

"Whilst in the longer term we can see the advantages of this audacious and opportunistic acquisition, on a 12 month view, we think that the shares will underperform," said Barrie Cornes, analyst at Panmure Gordon.

AIG, which is now 80 percent owned by the U.S. government, said Friday it lost $8.87 billion in the fourth quarter as its general insurance business remained weak.

As of Dec. 31, AIG's outstanding assistance from the U.S. government totaled $129.26 billion, up 5.7 percent from the end of the third quarter due to accrued interest.

That total includes $94.76 billion in loans and interest, and $34.5 billion tied to the value of investments the government bought from AIG. As those investments pay off or rise in value, the government recoups more money.

Last month, MetLife Inc. confirmed that it is in talks with AIG to buy one of AIG's insurance units. Media reports price the deal at as much as $15 billion. The two companies have been in discussions for months about a potential deal for AIG's American Life Insurance Co., known as Alico.

Prudential said it expected to complete the acquisition of AIG's Asian unit in the third quarter, subject to approval from regulators and shareholders.

"This transaction is hugely exciting and a one-off opportunity to transform the group," said Prudential CEO Tidjane Thiam.

"Asia has been very clearly a major driver of value for Prudential for several years and in 2009 it accounted for 44 percent of new business profit (post-tax)," he added. "The combined group would have 60 percent of 2009 new business profit coming from Asia and puts us in a strong leadership position in all the critical growth markets in the region."

Prudential estimated pretax savings of $340 million per year within three years.

"This acquisition is not about cost savings," Thiam said in a conference call. "We are making this transaction because we believe there is extraordinary growth in Asia."

Prudential said its sales were up 42 percent in the fourth quarter in Asia, which the company calls "the engine of the group's future growth."

Prudential released its 2009 results ahead of schedule on Monday, reporting a net profit of 676 million pounds ($1.01 billion) compared to a loss of 396 million pounds in 2008.

The Prudential deal will involve creating a new company, also to be known as Prudential PLC and listed on the London Stock Exchange, which will acquire the assets of the existing company and of AIA, Prudential said.