UPDATE 3-Australia's AMP ends talks with Ares, opts for spin-off

* AMP investors to receive shares in new private markets company

* New company to list on the Australian stock market

* AMP announces A$200 million share buyback

* Further cash-backs to investors unlikely - UBS (Recasts and updates throughout with investor, share reaction)

By Paulina Duran

SYDNEY, April 23 (Reuters) - Embattled Australian wealth manager AMP Ltd has ended protracted talks to sell its asset management arm's private markets business to Ares Management Corp, instead announcing on Friday it will spin off and re-brand the unit.

The restructure is expected to be completed in the first half of fiscal 2022, and will be followed by a A$200 million ($154 million) share buyback.

AMP first disclosed Ares had approached it in late October with an offer to buy the whole company for $4.9 billion. It downgraded that in February to a proposal to take a majority stake in AMP Capital's private business.

"We have had substantial and constructive discussions with Ares regarding a sale, however, we have not been able to reach an agreement," AMP Chair Debra Hazelton said in a statement.

"We will now accelerate our demerger planning, building on the preliminary work already undertaken."

Ares declined to comment.

The demerged company, which will be listed on the Australian stock market, will own at least 80% of the private markets business with AMP holding the remaining minority stake. The business, which includes infrastructure equity and debt as well as real estate, has more than A$50 billion of assets under management.

AMP's operations will consist of retail wealth management in Australia and New Zealand and a smaller bank.

"There's been a cloud of uncertainty around AMP's strategy (and) it's good to have some certainty and clarity now," said Tim Hillier, an investment analyst at Allan Gray, the second largest investor in AMP.

"We are very happy for AMP to go ahead with separating AMP Capital and handing it to us, the shareholders."

AMP's shares rose as much as 7.5% but pared gains to a 0.4% lift in afternoon trading, valuing the company at A$3.8 billion ($2.9 billion), against a slightly lower overall market.

UBS analysts pointed that AMP shareholders will now fund additional separation costs and the paying down of debt.

"It would appear that external parties have struggled to see enough value in the AMP business to warrant taking it on," UBS analysts said, adding that further capital management initiatives now looked "unlikely".

AMP revealed in an operational update on Thursday that it continues to lose clients after three years of reputational damage.

AMP is still trying to right itself after a 2018 financial sector government inquiry uncovered systemic fee overcharging the company tried to cover from regulators. The scandal saw many of its top executives leave, and policyholders pull their funds.

Last year, it was further rocked by complaints about the promotion of banker Boe Pahari to head of AMP Capital after being the subject of allegations of inappropriate conduct. AMP's former chairman quit over the matter and Pahari's promotion was reversed. AMP said on Thursday that Pahari will depart the firm.

The spin-off will have operational independence to "establish a new brand", AMP said. ($1 = 1.2960 Australian dollars) (Reporting by Paulina Duran in Sydney and Nikhil Kurian Nainan in Bengaluru; Editing by Ramakrishnan M., Stephen Coates and Jane Wardell)