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SHANGHAI, March 31 (Reuters) - Alibaba's (9988.HK) six-way breakup plan has raised questions about the long-term shape of its profitable cloud unit, given that it will have to tackle heavy regulatory scrutiny at a time when competition is intensifying both in China and abroad.

While a split into a standalone unit will give investors a chance to make focused bets on a business estimated by analysts to be worth between $41 billion and $60 billion, the step could put Alibaba's cloud unit even more in the cross-hairs of Chinese and overseas regulators, likely slowing its growth.

Some analysts said external investment and separation from Alibaba's core ecommerce business could help it grow overseas, where it is far behind rivals such as Amazon Web Services. But others see the Chinese state investing in the cloud unit or it even going private, given its dominance in the domestic cloud computing industry.

Alibaba's planned Cloud Intelligence Group, which will house the cloud business AliCloud as well as the tech giant's artificial intelligence and semiconductor research, has a 36% market share in China's domestic cloud computing sector.

Its servers host reams of data from companies ranging from tech peers to retailers, the handling and sharing of which has in recent years drawn increasing scrutiny from Beijing.

"Alibabas business lines have different levels and types of regulatory sensitivity," said Gavekal Dragonomics analyst Thomas Gatley in a note this week.

"For cloud computing, data security is paramount."

Alibaba and China's commerce ministry did not immediately respond to queries sent on Friday.

Receiving state investment and drawing closer to the Chinese government could satisfy regulators in Beijing, who have rolled out new laws regulating the handling of data in China and set up a data bureau to underline their focus on the area.

It could also help AliCloud to compete more effectively in China, where overall demand for cloud computing from internet companies is slowing and growth is mainly coming from governments and state-owned enterprises which have not migrated to the cloud as quickly.

While government entities "will not completely reject" companies like Alibaba, Baidu , and Tencent Holdings (0700.HK) for their projects, "they will have a tendency to choose companies with a government funding and backgrounds," said Zhang Yi, who tracks China's cloud computing sector at research firm Canalys.

In the first half of last year, China's top three telcos - China Mobile (0941.HK), China Unicom (0762.HK), and China Telecom (0728.HK) - collectively surpassed Alibaba's share in the domestic cloud market for the first time, according to brokerage Jefferies, underscoring Beijing's growing reliance on state-backed carriers for data management.

But growing closer to Beijing has a downside, said Michael Tan, a Shanghai-based partner of law firm Taylor Wessing.

"It could backfire at the international level, as it might then face even more attention from the U.S.," he said.

In January, Reuters reported that the Biden administration is reviewing Alibaba's cloud business to determine whether it poses a risk to U.S. national security.

The cloud unit has its own domestic problems to fix.

In 2021, China's Ministry of Industry and Information Technology suspended an information-sharing partnership with AliCloud on the grounds that Alibaba did not report a security vulnerability related to the open-source logging framework Apache Log4j2.

And in December 2022, Alibaba Cloud experienced what it called its "longest major-scale failure" for more than a decade after its Hong Kong and Macau servers suffered a serious outage that affected many services in the region including ones belonging to crypto exchange OKX.

Weeks after the outage, Alibaba group Chairman and CEO Daniel Zhang took over as head of the cloud unit, a role he will continue to hold concurrently even after the split-up.

Another risk from the planned split of the cloud unit, which had sales of around $11.5 billion last year, is that previously captive in-house Alibaba clients start courting rivals, hurting its revenue.

But splitting the cloud unit away could also be a positive for the other Alibaba businesses, some analysts said.

"When all data was put in one basket at Alibaba, there could always be concern about misuse of data within the company to maximise profit," said Tan at Taylor Wessing.

"The restructuring will help avoid this."

($1 = 6.8902 Chinese yuan renminbi)

Reporting by Josh Horwitz; Editing by Brenda Goh and Muralikumar Anantharaman

Our Standards: The Thomson Reuters Trust Principles.

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Analysis: Alibaba overhaul leaves fate of prized cloud unit up in the air - Reuters