WASHINGTON BUREAU — Prudential P.L.C. has withdrawn its offer for American International Assurance, and analysts say American International Group Inc. (NYSE:AIG) likely will try to sell AIA through an initial public offering.

Shareholders of Prudential, London (NYSE:PUK), have been pressing the company to drop the offer or renegotiate the deal, because of a belief that Prudential got a bad deal when it agreed in March to pay $35.5 billion in cash and securities for AIA, a large Asian life insurer.

Prudential has been trying to cut the total price to $30.4 billion, and the amount of cash to be paid up front to $23 billion, from $25 billion.

“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,” Prudential Chairman Harvey McGrath says in a statement. “We are therefore withdrawing from the transaction.”

The U.K. Prudential has no connection to Prudential Financial Inc., Newark, N.J. (NYSE:PRU).

AIG Chief Executive Robert Benmosche earlier sent a letter about the AIA deal 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,” Benmosche says in the letter.

An AIG property-casualty unit has succeeded at tapping the commercial capital markets, and efforts to sell another Asian life business, American Life Insurance Company, to MetLife Inc., New York (NYSE:MET), for $15.5 billion have been moving ahead, Benmosche says.

Because of the capital markets transaction and the ALICO deal, “we have more flexibility regarding timing as well,” Benmosche says.

AIG has said in the past that it will use the proceeds from the ALICO deal and any AIA transaction to re-pay the Federal Reserve Bank of New York and the U.S. Treasury Department for the aid the New York Fed and the Treasury Department have given AIG since September 2008.

AIG has been using AIA and ALICO as collateral for a $29.8 billion New York Fed credit facility.

“Our overall strategy remains unchanged,” Benmosche writes in the letter to AIA employees. “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.”

The domestic SunAmerica Financial Group life unit and the domestic Chartis property-casualty unit “will form the core of AIG’s nucleus of businesses,” Benmosche says.