This comes after China Strategic on Monday failed to gain approval from the island's regulator to acquire Nan Shan - the Taiwan unit of American Insurance Group.

China Strategic now will buy a 9.95-percent stake in the Taipei-based Chinatrust for about US$630 million, on condition that the Hong Kong-listed firm is able to conclude the Nan Shan deal.

The subscription price would be NT$17.74 (HK$4.28) per share, a 12.8-percent discount to NT$20.35 - Chinatrust's closing price yesterday.

It is believed that the island's regulator and lawmakers cast strong doubts about China Strategic's mainland background.

The sale to Chinatrust will help to dilute this background, making it easier to gain approval from Taiwan's Financial Supervisory Commission.

A memorandum of understanding for the deal was signed yesterday. The purchase will enable Chinatrust -Taiwan's second largest financial firm by value - to close the gap with biggest insurer Cathay Financial Holding, said Chinatrust vice president Vanney Cho. But the deal still requires the board approval, Cho added.

Last Wednesday, more than 10,000 Nan Shan Life agents demonstrated outside the firm's Taipei headquarters.

They were demanding a full refund of their pension fund before any asset sales by Nan Shan's beleaguered parent AIG. The petitioners, as well as lawmakers, urged Taiwan regulators to be cautious about China Strategic. Taiwan law does not allow mainland investment in the financial sector. Foreign firms, which secure 30 percent or more funding from mainland entities are also barred from investing in the island.

China Strategic and Primus Financial Holdings last month won the bid to buy a 97.57-percent stake in Nan Shan for US$2.15 billion (HK$16.77 billion).

It was the biggest divestment for AIG, which is paying down loans in a US$182.3 billion US government bailout.