Thomas H. Lee Partners and a consortium that includes Blackstone Group and Carlyle Group are finalists to acquire Regions Financial Corp's Morgan Keegan brokerage and investment banking unit, sources familiar with the matter said on Monday.

A deal is far from certain, the sources said, as debt-financing markets remain tight, and Morgan Keegan faces the challenge of keeping some 4,100 employees in place amid uncertainty about their future.

Regions, a large regional bank which still has not repaid $3.5 billion of 2008 U.S. bailout money, in June announced the unit could be sold.

Regions is in parallel negotiations with the two private equity groups for the business, which has a book value of about $1.5 billion, one of the sources said on Monday.

Regions is hoping to get a price that's close to book value. If it does not, the Birmingham, Alabama, bank may decide not to sell the business, the source said.

The sources were not authorized to speak publicly.

Regions on June 22 said it had hired Goldman Sachs to explore options for Memphis-based Morgan Keegan, which has more than 300 offices spanning the U.S. South, Midwest, Texas and the Mid-Atlantic.

Regions bought Morgan Keegan for $789 million in 2001, just after the tech stock rally peaked and as most commercial banks snapped up fee-producing regional brokerages and trading firms. Morgan Keegan, which has more than 1,200 financial advisers, was formed in 1969.

Morgan Keegan also has an investment bank that advises on mergers, underwrites and trades stocks and bonds. Last year the unit generated $1.1 billion of revenue

The ongoing Morgan Keegan auction attracted several private equity bidders as well as rival brokerages Stifel Financial Corp and Raymond James Financial Inc in the initial stages, sources have said previously.

Other private equity firms that were interested included TPG Capital , Apollo Global Management and Warburg Pincus , sources have said.

Regions on that same June day settled for $210 million allegations that Morgan Keegan fraudulently marketed mutual funds heavily exposed to subprime mortgages, which plunged in value starting in 2007.

But the financial markets have worked against Regions since it announced its strategic plans.

In the past few months an intensifying debt crisis in Europe and fears about a weakening U.S. economy have spooked markets, hurting both the Morgan Keegan business and the ability of buyers to pay up for it.

Stifel's stock, for example, has fallen more than 24 percent since August, while Raymond James is down more than 13 percent.

Rivals also faced an additional challenge -- Morgan Keegan management preferred a private equity buyer over them, with employees interested in participating in a transaction, a source told Reuters earlier.

Recruiters have said potentially hundreds of the more than 1,200 brokers in Morgan Keegan's private client group had lined up job leads in case they decided to leave once a buyer was named.

Regions shares closed Monday up 5.9 percent at $3.60 on the New York Stock Exchange.

Morgan Keegan, Thomas H. Lee, Blackstone and Carlyle declined to comment. Regions officials did not return calls seeking comment.

(Reporting by Paritosh Bansal, Soyoung Kim and Joe Giannone in New York; editing by Bernard Orr)

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