UK insurer Prudential has abandoned its plan to buy AIG's Asian life unit for $35.5 billion, leaving management under fire and the company facing a $659 million bill for failure.

Prudential's move to drop out was widely expected after bailed-out U.S. giant American International Group refused to cut the price, turning down a last-ditch effort by Britain's largest insurer to appease shareholder concerns.

We listened carefully to shareholders over the price and initiated a renegotiation of the terms with AIG. Unfortunately, it has not been possible to reach agreement, Prudential's chairman, Harvey McGrath, said in a statement.

We are therefore withdrawing from the transaction.

For AIG the collapse of the sale means it must weigh up its options including a potential return to its previous plan to float off American International Assurance (AIA) with a record initial public offering reckoned to be worth up to $15 billion.

For Prudential, however, the end of the botched takeover effort leaves its own strategy open to question and its management open to criticism, with Chief Executive Tidjane Thiam and McGrath seen as having personally spearheaded the plan that would have made it Asia's largest foreign-owned insurer.

Both were expected to spend much of Wednesday speaking to top investors, smoothing ruffled feathers and hoping to dampen revived talk of a break-up of Britain's top insurer.

They will also have to explain away the hefty 450 million pound ($653.8 million) cost of the failed deal, including a break-up fee, the impact of currency hedging and other costs.

The risk is the company is rudderless, lacking leadership, analyst Marcus Barnard at Oriel Securities said.

They have incurred a net 450 million of costs, after the effect of currency hedging which would probably have given them between 300 and 500 million of pounds -- so you have basically spent 750 million to a billion pounds of shareholders' money and you have nothing to show for it. It's a tough one.

Prudential's London-listed shares jumped on news of the likely withdrawal on Tuesday, but were down 2.8 percent at 559.5 pence at around 1120 GMT on Wednesday.

SHAREHOLDERS TO MEET

Prudential's retreat will mean it has avoided the risk of an embarrassing and virtually unprecedented public defeat at the hands of shareholders who were due to vote next Monday on the deal and a $21 billion rights issue to help fund it.

Shareholders will still meet next week, however, in a gathering that is now expected to provide the first opportunity for many to quiz management on what went wrong, and why.

Management are in a very difficult position given the turn of events that have unfolded. We would like them to set out the strategy for the next one to three years and then make a judgment from there, one top investor told Reuters.

Investors were also asking how long Thiam, in the top job at the Pru for less than a year, can remain at the helm. It is not yet clear whether rebel shareholders will press ahead with earlier plans for a vote of no confidence at Monday's meeting.

With most executive board members involved in the deal -- including UK boss Rob Devey who headed up integration efforts and Asia head Barry Stowe -- several institutional investors tipped Michael McLintock, who currently heads up Pru's asset manager M&G, as the internal front-runner to replace Thiam.

The appointment of Thiam, a former Ivory Coast government minister, was welcomed by the market but his leadership during the Asian deal has been widely criticized. Investors and analysts have pointed to errors including a regulatory hitch that caused an unprecedented delay in launching a rights share offer this month.

Thiam had argued the AIA deal would give the 162-year-old British insurer a rare opportunity to grab a commanding presence in Asia. But shareholders said the deal was simply too costly, pointing to the risks associated with integrating employees of two fierce insurance rivals in Asia.

AIG REJECTED PRICE CUT

The original deal was valued at $35.5 billion but Prudential then lowered its offer to $30.4 billion.

AIG Chief Executive Robert Benmosche was in favor of accepting a revised offer as it offered more liquidity than alternatives of not selling to Prudential, and sooner, one person familiar with the situation told Reuters.

But the AIG board, which met late on Monday, decided against doing so. One important sticking point was that AIG wanted assurances from Prudential that it would be able to complete a revised deal, other sources familiar with the matter said.

Prudential was not able to provide those assurances, said the sources, who declined to be identified.

AIG may now revive a planned initial public offering of AIA. [ID:nTOE64Q07L] But there are doubts whether an IPO could fetch the same valuation as that offered by Prudential.

There is also the issue of timing the market so as not to clash with a flood of Chinese bank capital-raisings slated to hit the market later this year.

AIG took advice from Citigroup , Morgan Stanley , Goldman Sachs , Blackstone and Deutsche Bank.

Credit Suisse, HSBC and JPMorgan Cazenove were leading Prudential's rights issue as joint sponsors, global co-ordinators and bookrunners.

($1=.6883 pounds)

(Additional reporting by Denny Thomas in Hong Kong and Raji Menon in London; Editing by Muralikumar Anantharaman and Greg Mahlich)

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