Insurance Australia Group (IAG) has started negotiations to acquire Aviva's Australian division, according to the Australian Financial Review.

Speculation over the deal peaked yesterday when IAG asked the Australian Stock Exchange to suspend its shares, after the insurer revealed it was in negotiations with Aviva.

Aviva would not comment further on the proposed merger, which analysts said would raise competition concerns in motor vehicle insurance, with IAG already holding a 42% market share. A spokesperson said: "We never comment on rumour and speculation."

IAG has already announced it will have to raise capital for the acquisition of Aviva Australia, estimated to be worth £631m. The acquisition would keep IAG on track to meet its aim of doubling its premium income within five years.

Aviva recently sold assets to shore up its depleted capital base as plummeting stocks have eroded its assets. Analysts believe that the acquisition would help bolster the company.

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