The move comes just six weeks after another major UK player, Legal & General, sold its Australian business - also to Colonial - for A$892m.
It leaves Norwich Union, which lost out in the bidding for the Legal & General business, as the only UK insurance group with a significant stake in the Antipodean insurance market.
Analysts hailed the Pru's decision to withdraw from the market as sensible, particularly given the price it was able to achieve. "It was a case of either get bigger or get out," said one.
The sale will yield an immediate exceptional profit of pounds 200m which will be booked in the figures for the year ending 31 December 1998.
The Australian market is in the throes of consolidation following the flotation of both Colonial and rival AMP last year, which sparked a price war in the insurance sector.
Keith Bedell-Pearce, Prudential's director for international affairs, said: "Whilst we made excellent progress in New Zealand, the overall market size restricted future growth prospects."
However, the Pru saw its share price fall yesterday by 10p to 750p on concerns that the company's growing cash pile would add to the pressure on Prudential's chief executive, Sir Peter Davis, to pull off a sizeable UK deal.
Mr Davis is still believed to have his eyes on the building society sector, although following Nationwide's narrow vote against conversion an imminent move is thought unlikely.