Shares in Prudential tumbled 12% after the UK's second-largest insurer announced plans to buy AIA for $35.5bn (£23bn).
The Prudential said that the agreement to take over the Asian arm of AIG was a "compelling" chance to create South East Asia's leading insurer.
But investors sent Prudential shares lower on concerns that the deal will be part-funded by a $20bn rights issue.
Pru shares closed down 72 pence at 530p, after hitting 515p at one point.
BBC business editor Robert Peston said that the $20bn rights issue ranked as one of the biggest cash calls by a UK company.
Only the emergency rescue rights issues of Royal Bank of Scotland and Lloyds have come anywhere close in respect of amount of money raised, he said. The Prudential will also raise $5bn in borrowings to fund the deal.
Prudential will pay US-based AIG $25bn in cash plus $10.5bn in shares, giving the US company an estimated 11% stake in the UK firm.
Shares in the Prudential were suspended in London this morning pending an announcement, but fell immediately trading resumed.
Analysts at brokerages Oriel Securities and Panmure Gordon downgraded Prudential shares on fears about the size of the rights issue.
Kevin Ryan, analyst at ING, said the fund-raising was "going to be enormously dilutive. No one knows exactly what AIA contains or how profitable it is, or how it overlaps with Pru's existing businesses".
The acquisition is a big move for Prudential chief executive Tidjane Thiam, who is only five months into the job.
He said: "This transaction is hugely exciting and a one-off opportunity to transform the group, [putting] us in a strong leadership position in all the critical growth markets in the region."
The merged company will retain its headquarters and listing in London. But an application for a dual primary listing in Hong Kong will be made in "due course", Mr Thiam said.
He said that there were no plans to sell the Prudential's UK operation, and described London as the company's "historic home".
"The UK generates cash and capital for us - it's a very important part of the group and sits comfortably within our portfolio," Mr Thiam said. The Prudential has about seven million customers in the UK.
Demand for personal financial services in Asia is booming, fuelled by the region's strong economic growth.
The Prudential is already the second biggest insurer in South East Asia. This deal is expected to make it the biggest.
Analysts believe the deal, which would double Prudential's market value to about $46bn, faces a number of hurdles.
Shareholders in the Prudential will need convincing that the two companies can integrate their complex structures in 13 Asian markets.
For example, AIA and Prudential operate with different joint venture partners in India and China. Such agreements may have to be unwound.
In some Asian markets, the combined group's dominance could raise competition issues.
Sally Yim, a senior analyst at Moody's, said: "In Singapore [AIA and Prudential] may have over 30% market share. It's significant. There might be some questions raised, but I don't think it would trip the deal."
Toby Langley, analyst at Sanford C. Bernstein, said in an research note: "Pru-AIA would have number one market position in eight key Asian markets, and would put considerable daylight between itself and other Asian players."
He added that a deal "has substantial industrial logic and could be very attractive for Prudential".
Financial services boom
Asia's rapid economic growth has generated huge demand for financial services, said Hugo Young, managing director of Aberdeen Asset Management Asia, in Singapore.
In an interview with the BBC World Service, he said: "The reasons for [Pru and AIA] being interested in Asia are simply the dramatic growth of financial products, life assurance, and the like that we're seeing exploding through Asia, as Asia develops rapidly. Whereas the more developed markets of the US and Europe are relatively mature.
"Many moons ago there was scepticism, particularly among Chinese, about taking life policies, given its association with death in a perverse sense. Life policies were not uppermost in many people's list of investment requirements and protection requirements."
Prudential said it hoped to complete the rights issue by early June, and get regulatory approval for the acquisition in the third quarter of 2010.
AIG was bailed out by the US government in 2008 and is now 80% owned by it. In total, the firm has received $182.5bn of government funding.
Prudential's move for AIA came as AIG was preparing to float its Asian arm in Hong Kong in April. The flotation had an estimated value of $10bn, which would have been among the largest listings on any market this year.
There had also been speculation that the Prudential's UK life assurance business would be sold off to UK company Resolution.
However, Resolution has released a statement saying it has not been holding any talks with Prudential about the matter.