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TAIPEI Reuters Taiwan regulators rejected AIGs AIG.N planned $2.2 billion sale of its Taiwan unit to a China-related group, citing regulations on mainland investment, and leaving the insurer facing another auction.

American International Group, needing to sell assets to pay back the U.S. government for a bailout, first agreed to sell the Nan Shan unit last October, but suspicions in Taiwan about the connections of buyer China Strategic 0235.HK with China and concern it could not run an insurance business held up the deal.

The economics ministry said on Tuesday that the deal did not comply with Taiwans rules on investment from its political foe China, and also noted the lack of experience in insurance on the part of battery maker China Strategic and its bid partner, Hong Kong investment firm Primus.

"It did not come as a surprise," said an analyst at a European financial institution, who asked not to be identified.

"AIG needs to pay back money to the U.S. government so ultimately it will have to sell the unit."

The ministry said China Strategic is able to appeal the decision within 30 days. Taiwans top regulator, the Financial Supervisory Commission, will hold a media briefing at 0900 GMT to talk further on the decision.

"It is reasonable that the FSC took a more cautious attitude in reviewing this case as it requires more in-depth levels of skill to run an insurance companys finances and management," said Susan Chu, a vice president at Standard & Poors in Taiwan.

AIG will find Taiwanese bank Chinatrust Financial 2891.TW waiting in the wings to bid for Nan Shan. The bank, Taiwans top credit card firm, has repeatedly said it wants to buy Nan Shan after coming second to China Strategic in the original bid in October.

On Monday a retired Taiwanese diplomat, who said he wanted to "save" Nan Shan from mainland Chinese hands, said he was lining up a bid, backed by unnamed Japanese and Qatari investors.

AIG and China Strategic were not immediately available for comment following the decision.

China Strategics shares were suspended in Hong Kong after the announcement.

Reporting by Argin Chang, Faith Hung and Rachel Lee; Writing by Jonathan Standing; Editing by Ken Wills

LONDON Reuters World stocks fell on Tuesday in markets dominated by concerns the U.S. economy is sliding back into recession, prompting further flows into safe-haven assets.

The yen - a favorite for carry trades at times of economic stress - hovered back near 15-year high against the dollar after investors brushed off Japans attempt to weaken the currency, yields on benchmark German government bonds hit record highs and the Swiss franc soared against the euro and dollar.

Mounting U.S. economic concerns likely to keep investors away from riskier assets and push up the yen, keeping pressure on Japan to intervene directly in currency markets for the first time in more than six years. Crude prices, seen as a proxy for world economic growth, also came under pressure, and were down 6.6 percent so far in August and on track for their worst monthly losses since May.

World stocks measured by MSCI All-Country World Index .MIWD00000PUS lost 0.9 percent. The index was also headed toward its worst monthly performance in three months.

Tokyos Nikkei average .N225 shed 3.6 percent, its worst daily drop in three months, after the Bank of Japans move the day before to boost cheap loans to banks failed to curb the yens strength.

In Europe, the FTSEurofirst 300 .FTEU3 index dropped 1.1 percent and the Thomson Reuters Peripheral Eurozone Countries Index .TRXFLDPIPU fell 1.3 percent. "If you look at all the noise, all the volatility and all the nervousness, its clear that this market has one major fear at the moment and thats the double dip," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

"And we are not going to have the answer to that one until the fourth quarter. There is more downside risk for equities over the next couple of weeks."

The VDAX-NEW volatility index .V1XI, Europes main barometer of investor anxiety, rose 3.4 percent. The higher the volatility index, the lower investors appetite for risk.

YEN NEAR 15-YR HIGH

The dollar was down 0.4 percent at 84.27 yen, not far from its 15-year low of 83.58 hit last week. The U.S. currency fell 2.5 percent against the Japanese currency this month after sliding 2.2 percent in July.

"Japans ministry of finance is sending signals that is willing to intervene but clearly people remember its struggle with intervention a few years ago," said Simon Derrick, head of currency research at Bank of New York Mellon.

"If they dont intervene when the yen is at 84, when will they do it? Once its goes to all time lows? I think their resolve of staying away from intervention will be tested."

Japanese Finance Minister Yoshihiko Noda repeated on Tuesday that the government would take decisive action on currencies -- usually seen as code for intervention -- when necessary, but reaction in the market was limited. The yen has lost more than 9 percent versus the greenback so far this year.

The euro fell 0.5 percent against the yen to 106.65 yen, crawling toward a nine-year low of 105.44 yen hit last week.

The single currency also fell to an all-time low against the Swiss franc, which also hovered close to a seven-month high against the dollar.

Yields on benchmark 10-year German Bunds hit record lows at 2.085 percent, while those on 10-year U.S. Treasuries slipped 2 basis points to 2.5143 percent, hovering near 18-month low.

In the commodity market, oil lost 1.4 percent to trade below $74 a barrel, while copper dropped 0.9 percent but was still up 1.3 percent this month.

Additional reporting by Atul Prakash, Anirban Nag and William James in London; Editing by John Stonestreet