(Reuters) - Ally Financial said it will sell its Europe and Latin America operations to GM Financial, a unit of General Motors, for about $4.2 billion.

The combined operations in Europe and Latin America represented about $16.1 billion in assets at the end of the third quarter, Ally said in a statement.

The transaction involves two companies that are still partially owned by the U.S. government after a series of bailouts. The companies also have an intertwined history: Ally is the former financing arm of GM and was once known as GMAC.

The deal is expected to add $300 million to $400 million to GM Financial's annual earnings before taxes.

GM expects to contribute about $2 billion in cash to GM Financial to fund the purchase, the automaker said in a separate statement. http://r.reuters.com/far24t

GM has been gradually rebuilding its finance operations since selling a controlling stake in GMAC to private equity firm Cerberus Capital Management in 2006.

The U.S. automaker bought AmeriCredit Corp in 2010 and in August disclosed it was among the bidders for Ally's international operations. GM and Cerberus remain Ally shareholders.

Ally is focusing on U.S. auto lending and banking in a bid to turn its business around. In May, its Residential Capital (ResCap) mortgage unit filed for bankruptcy, and on Wednesday a bankruptcy court judge approved the sale of its mortgage operations to Ocwen Financial Corp and Walter Investment Management Corp for $3 billion.

ResCap is also selling a loan portfolio to Warren Buffett's Berkshire Hathaway Inc for $1.5 billion.

Of the $17 billion it owes the U.S. government, Ally has paid back $5.8 billion, including dividend payments.

Ally, which is 74 percent owned by the U.S. government, announced in May a plan to sell its international operations in a bid to speed up repayment of taxpayer money.

Ally agreed to sell its Canadian auto finance and deposit business to Royal Bank of Canada for $4.1 billion and its Mexican insurance unit to ACE Ltd for $865 million last month.

Reuters reported earlier this month that Ally was nearing a deal to sell its Europe and Latin America operations, with GM emerging as the leading bidder.

(Reporting by Rick Rothacker in Charlotte,Ben Klayman and Deepa Seetharaman in Detroit, Sharanya Hrishikesh in Bangalore; Editing by Anil D'Silva and Sriraj Kalluvila)