HONG KONG/SINGAPORE - Bank of America has dropped plans to exit Merrill Lynch's Asia property funds business and will instead help it raise new money, cashing in on a recovery in the real estate sector, sources said.

BofA was in talks with several private equity firms, including Blackstone Group and Apollo Investment Management, to sell management rights to its $2.65 billion Asia Real Estate Opportunity Fund, which the bank regarded as a non-core business.

Despite negotiations lasting more than six months, no deal was reached because of disagreements over financial terms and the complicated structure of Merrill's property funds business, the sources, who had direct knowledge of the matter, told Reuters on Wednesday.

BofA has hired people in Beijing to raise money for a new Asia-focused property fund, the sources said, adding China remains a focus for the Merrill funds.

In China, Merrill invested a few years ago in the development of the Beijing Yintai Center, a top-end complex where the luxury hotel Park Hyatt Beijing is located on the historic Chang An Avenue. The investment has been a profitable one for Merrill, one of the sources said.

The sources, who were involved in the bidding process and have business ties with BofA, declined to be identified as they were not authorized to speak to the media.

Basically, there was a lack of interest on Merrill Lynch's part to go forward with the process, said a prospective bidder, who asked not to be identified.

A BofA spokesman in Hong Kong declined to comment.

Bank of America took over Merrill at the end of 2008 during the financial crisis.

In October 2008, just two months before the deal went through, Merrill launched the Asia property fund with a focus on Japan, China, India and South Korea.

Investors, also known as limited partners, in the Merrill property fund include many rich families and some sovereign funds in the region, said one of the sources.

GROWTH, RISKS

Property market transactions in Asia have risen in recent months as investor confidence and credit conditions have improved.

A research report released last week by property consultancy firm DTZ, for instance, showed the value of property transactions in Southeast Asia rose 25 percent in the last three months of 2009 from the preceding quarter.

We are seeing evidence that institutional interest is coming back into commercial property in Singapore, said Foo Sze Ming, an analyst at OCBC Securities in Singapore.

The sharp rise in property prices has set off worries of asset bubbles among some analysts and government officials. China has responded to the concerns and tightened credit availability for real estate purchases.

For China, it would be depend on how the tightening works. If prices come down, then funds will use the opportunity to acquire assets in China, said OCBC Securities' Foo.

U.S. President Barack Obama has called for major American banks to reduce their risk-taking by closing some non-traditional banking services, which may force banks to give up their private equity and hedge fund business.

At least for now, Bank of America does want to keep it, but for how long, no one knows, said one of the sources.

Merrill is not alone making property investments in Asia. Rivals, including Goldman Sachs (GS.N) and Morgan Stanley (MS.N), are long-time players in some key Asian markets like China.

In March, Morgan Stanley raised $6 billion for a new global property fund, including money from China Investment Corp, the sovereign wealth fund, Reuters reported.

(Additional reporting by Lee Chyen Yee in Hong Kong, Kevin Lim in Singapore and Megan Davies in New York)

(Editing by Muralikumar Anantharaman)

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