(Adds that talks with potential cornerstone investors failed)
By Arno Schuetze
FRANKFURT, Jan 18 (Reuters) - Failed Icelandic bank Kaupthing is pressing ahead with a stock market listing of its domestic arm Arion, people close to the matter said, a key step in Iceland's rehabilitation in the global financial system.
Kaupthing, once a major international bank, went into administration and its domestic operations were separated into Arion Bank in 2009. Iceland became the first western European country in more than three decades to be bailed out by the International Monetary Fund.
Kaupthing - now a holding company - has mandated Swedish investment bank Carnegie to act as global coordinator for Arion's initial public offering together with Citi and Morgan Stanley, the sources said.
Other banks, including Deutsche Bank, have secured roles as bookrunners that will help with the share sale, which may take place as early as April, they said.
Citi and Morgan Stanley were asked in 2016 to do preparatory work for the IPO, almost a decade after Iceland's banking sector collapsed.
In late 2015 Kaupthing finished its winding up process and reached an agreement which turned its creditors into shareholders. It owns 87 percent of Arion, which includes insurance, asset management and retail banking assets, while Iceland's government owns the rest.
The banks declined to comment.
After talks with some of Iceland's pensions funds who had considered buying an Arion stake ahead of the IPO broke down recently, the IPO will likely go ahead without a such cornerstone investor, one of the people close to the deal said.
Kaupthing had been in talks with the funds about an Arion valuation of 0.8 times the book value of its assets, which had the pension funds had conceived as being too high, the person said.
Such a valuation would have been roughly in line with that of banks such as BNP, Santander and Credit Suisse, but a premium to lenders such as Barclays , Societe Generale or Deutsche Bank.
Last week, the Government of Iceland said in a statement that it was not ideal for the state to own a majority of the share capital in commercial banks in the long term.
"Therefore, it is important to reduce the state's ownership in small steps and in accord with a broad consensus," it said. (Additional reporting by Ragnhildur Sigurdardottir in Reykjavik, Anna Ringstrom and Daniel Dickson in Stockholm and Robert Venes at IFR in London; editing by Jason Neely and Elaine Hardcastle)