"Unfortunately, it has not been possible to reach agreement, so we feel it is in the best interest of our shareholders not to pursue this opportunity," said Prudential Chairman Harvey McGrath in a statement."

Earlier, anticipating that Prudential was under pressure to renegotiate its contract to buy the company, AIG CEO Robert Benmosche sent a letter of reassurance to AIA employees.

"Because of the progress AIG has made in the last several months, we will have several options to consider regarding AIA--more than we did in March [when the deal to sell AIA to Prudential was made]," he said. "Given such major milestones as ILFC's (International Lease Finance Corp.) accessing the capital markets and the progress we are making toward closing the ALICO (American Life Insurance Company) sale to MetLife, we have more flexibility regarding timing as well."

The issue is important because AIG is working to pay off the government's large stake in the company.

In testimony last week at the Congressional hearing, a Federal Reserve Board official testified that it owns non-controlling preferred equity interests in AIA as well as another pan-Asian life insurance company, ALICO, as collateral for a $29.8 billion credit facility that finances AIG's operations.

According to the testimony, AIG would have used $16 billion of the cash gained from the AIA sale to reduce the government's stake in it.

In the statement, Mr. Benmosche alluded to that goal, saying, "Our overall strategy remains unchanged. We remain focused on monetizing AIA and ALICO as quickly as possible so that we can make good on our commitment to repay taxpayers--and on appropriate terms given the unique strengths of these highly attractive franchise."

"As we've said before, going forward, Chartis and SunAmerica Financial Group will form the core of AIG's nucleus of businesses," he added.

Prudential's withdrawal was expected in the wake of the late Monday decision by AIG, apparently after extensive involvement with Fed and Treasury officials, not to accept a proposed lower offer.

Prudential proposed to reduce the asking price from $35.5 billion to $30.4 billion. Under the revised deal, Prudential would have paid $23 billion in cash to AIG; the original deal called for $25 billion in cash.

Clifford Gallant, head of property and casualty research at Keefe, Bruyette and Woods in New York, said he believed AIG rejected the revised offer, after consulting with the government, "either because they think it is too low a price or, even at that price, the deal might not get done."

AIG will be entitled to a breakup fee from Prudential of ?153 million ($224.8 million at current exchange rate).

AIA Group has operations in Australia, Brunei, China, Hong Kong, India, Indonesia, Macau, Malaysia, New Zealand, Singapore, South Korea, Thailand and Vietnam.