The sale is intended to comply with the Indonesian central bank's single presence policy, which takes effect by the end of 2010 and is designed to promote consolidation among the country's 130 banks.

Temasek's unit Fullerton owns a 75 percent stake in Sorak Financial, which in turn owns a controlling 55.78 percent stake in BII. This effectively values Temasek's stake at around $700 million based on current share price.

Analysts had long expected that Temasek, which faces problems over its telecoms holdings in Indonesia, would look at a merger of its Indonesian banking interests. Temasek also controls Indonesia's fifth-largest lender, PT Bank Danamon Tbk .

"We have evaluated our options under the single presence policy in Indonesian banking and are exploring the sale of our investment in Bank Internasional Indonesia," Myrna Thomas,

Managing Director for Corporate Affairs at Temasek, said in an emailed statement.

"Our final decision will be based on what optimises value for our shareholders. We remain optimistic about the prospects of Indonesian financial services sector," the statement said.

BII said in a separate statement that Fullerton Financial Holdings is expected to complete the sale before December 2010.

Bank Danamon also issued a statement on Monday in which it said that Fullerton had decided not to pursue a merger option between BII and Danamon.

Danamon shares ended 0.71 percent lower at 6,950 rupiah, while BII's shares jumped more than 3 percent on Monday on reports of a divestment. The Indonesia Stock Exchange index finished 0.39 percent higher.

"The bigger picture appears to be that Temasek is shuffling its portfolio to take advantage of the opportunities created by the subprime crisis," said Simon Tay, an analyst at Singapore Institute of International Affairs.

"Why would Temasek want to expose itself to immature and geo-politically-riskier emerging markets if there are opportunities in mature and stable markets in Europe and America?," he added.

The Wall Street Journal reported on Monday that potential bidders for Temasek's stake include cash-rich Chinese banks, adding that Industrial and Commercial Bank of China, China's biggest bank, had purchased a 90 percent stake in Indonesia's PT Bank Halim in December 2006.

ICBC declined to comment.

BACKLASH

Temasek, which invested heavily in Indonesia after the Asian financial crisis in 1997/98, has faced a nationalist backlash in the region.

In November, Indonesia's telecom regulator ordered Temasek to sell its stake in one of the two major Indonesian mobile phone firms its units own within two years.

In Thailand, Temasek's purchase of Shin Corp, the country's biggest telecoms group, from the family of the Thailand's former prime minister prompted public protests that helped trigger a military coup. Southeast Asia accounted for 12 percent of its investments, according to its Web site.

In recent months, the state investor diverted its attention toward Western banks, which were looking for lifelines to shore up their capital after losing billions from the US subprime mortgage crisis.

In December, Temasek decided to take an almost 9 percent stake in Merrill Lynch for $4.4 billion, while its sister fund, the Government of Singapore Investment Corp took multi-billion dollar stakes in Citigroup and UBS .

Temasek is headed by the wife of Singapore's prime minister.

BII is controlled by a consortium including South Korea's Kookmin and Temasek.

Additional reporting by Muhamad al Azhari, Yvonne Cheong and Kennix Chim

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