(Adds background on U.S. Department of Justice lawsuit on 1MDB in final two paragraphs)
KUALA LUMPUR, May 9 (Reuters) - Malaysia is trying to rope in China's Dalian Wanda Group Co Ltd to develop a $1.7 billion Kuala Lumpur property project, barely a week after it dumped its original partners in disputed circumstances, sources aware of the discussions said on Tuesday.
The collapse of the deal to sell Bandar Malaysia, previously owned by troubled state fund 1Malaysia Development Berhad, resurrected the 1MDB financial scandal at an awkward time for Prime Minister Najib Razak, who is expected to call a general election later this year.
Just late last month, 1MDB agreed to pay $1.2 billion to settle a debt dispute with Abu Dhabi, in a deal that was slammed by Najib's opponents for exposing Malaysian taxpayers to more debts racked up by 1MDB.
An investment by Dalian Wanda - owned by China's richest man Wang Jianlin - would be a big boost for Najib, who will be in Beijing for the Belt and Road Forum for International Cooperation on May 14-15.
Discussions are still underway and nothing has been finalised yet, two Malaysian industry sources aware of the talks said. If agreed upon, Najib, will announce the agreement during his Beijing trip, they added.
Bandar Malaysia, a former 1MDB asset before being transferred to the finance ministry last year, is one of the biggest development projects in the country and is expected to house a terminal for the high speed rail connecting Kuala Lumpur and Singapore.
Sources said Malaysia wants to build a tourism and entertainment hub at Bandar, to compete with neighbouring Singapore.
Wanda Group's business includes property development, shopping malls, cinema chains and theme parks. It owns Legendary Entertainment, co-producer of film hits such as "Jurassic World", and U.S. cinema chain AMC Entertainment Holdings Inc .
News of the deal was reported earlier by Singapore's Straits Times newspaper.
The report said talks are at an advanced stage to make the Wanda the master developer, and this is awaiting approval from China's financial regulators.
Quoting unnamed financial executives, it said that Wanda has proposed to use half of the development for tourism and entertainment-related ventures valued at roughly $8 billion.
Any big ticket investment would require regulatory approval due to China's curb on cross-border capital outflows.
Malaysia said last Wednesday the initial $1.7 billion property deal for Bandar Malaysia, collapsed as the buyers, Iskandar Waterfront Holdings and China Railway Engineering Corp (CREC), failed to make payments.
Iskandar and CREC refuted the claims, saying they had fulfilled all the payment obligations.
Money raised from the deal was expected to ease the debt burden of 1MDB, which is at the centre of several international money laundering probes. 1MDB had racked up more than $11 billion in debt before beginning a restructuring programme in 2015.
The announcement shook Malaysia's stock market on Thursday, as traders feared the deal's collapse was a sign that Chinese investors were pulling funds from Malaysia.
Though markets recovered a day later, the doubts over whether Chinese investors would stand by Malaysia linger on.
“This potential u-turn in sentiment could halt or reverse the strong year-to-date foreign equity inflow into Malaysia...,” Investment firm UOB Kay Hian said in a note last week.
Beijing was seen coming to Najib’s rescue when China General Nuclear Corp (CGN) agreed to buy 1MDB’s power assets for $2.3 billion in Dec. 2015.
In November last year, Najib signed agreements totalling $34.4 billion during his visit to China.
Najib faced the biggest challenge to his leadership in 2015 after allegations that hundreds of millions of dollars was misappropriated from 1MDB.
Lawsuits filed by the U.S. Justice Department in July said more than $700 million of misappropriated funds flowed into the accounts of "Malaysian Official 1", who U.S. and Malaysian officials have identified as Najib. (Reporting by Praveen Menon and Liz Lee; Additional reporting by Matthew Miller in BEIJING; Editing by Simon Cameron-Moore)