Ambac Rocky Balboa oder chapter 11

* Plan splits Ambac's worst assets from muni business

WILMINGTON, Del. Jan 25 (Reuters) - A Wisconsin judge approved a rehabilitation plan for the insurance unit of bankrupt Ambac Financial Group ABKFQ.PK on Tuesday over the objections of hedge funds that said they held billions of dollars of policies.

Ambac Financial Group was once the second-largest U.S. bond insurer but ran into trouble when it strayed from insuring municipal bonds and began guaranteeing riskier securities backed by home loans.

The rehabilitation plan puts $64 billion of its Ambac Assurance Corp unit's worst assets in a segregated account and limits the payment on claims to 25 percent in cash and the rest in a note due in 2020.

Pink sheet shares of Ambac Financial Group were up 18 percent following the ruling.