Yahoo and Alibaba struck a deal last week whereby the Chinese company agreed to buy back up to half of the 40 percent stake in itself held by Yahoo for $7.1 billion, valuing Alibaba at $35 billion.

Alibaba is raising $4.6 billion of that target through an issue of preferred shares, bank loans and the sale of a stake to existing shareholders - Singapore state investor Temasek Holdings Pvt Ltd TEM.UL and DST Global. Another $2.5 billion in cash would allow Alibaba to fund the full $7.1 billion purchase.

Sources with direct knowledge of the matter said CIC's $2 billion purchase of the Alibaba stake would help the e-commerce company complete its funding for the Yahoo purchase.

Alibaba is also in talks with private equity firms that would assist in funding the remaining $500 million, sources said, including Bain Capital, Blackstone Group LP (BX.N), and Hony Capital.

The sources declined to be named because the discussions were private. Alibaba, Blackstone, CIC and Hony all declined comment. Bain could not immediately be reached for comment.

(Reporting by Stephen Aldred and Prakash Chakravarti; Additional reporting by Nadia Damouni in NEW YORK, Chyen-Yee Lee in HONG KONG and Gui Qing Koh in BEIJING; Editing by Denny Thomas, Michael Flaherty and Chris Lewis)

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