Besieged US insurer American International Group, which also has private banking interests, was saved from collapse by accepting an $85 billion, two-year federal loan and giving the government a majority stake.

The US authorities, which had not bailed out stricken US investment bank Lehman Brothers this week, have decided that a collapse of AIG, the US’s largest insurer by assets, would be too severe a blow for markets to bear. News services quoted the US Federal Reserve as saying that "a disorderly failure of AIG could add to already significant levels of financial market fragility".

AIG gives up a 79.9 per cent stake to the US government and senior managers including chief executive Robert Willumstad, will quit their jobs. Retired Allstate chief executive Edward Liddy will be AIG's new leader, said a person familiar with the plans, according to Bloomberg. Allstate is the biggest publicly traded home and auto insurer in the US.

"The AIG Board has approved this transaction based on its determination that this is the best alternative for all of AIG's constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders,” AIG said in a statement on its website.

“AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis,” the statement said.

AIG said it expected the proceeds of asset sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets.

"We commend the Federal Reserve and the Treasury Department for taking this decisive action to address AIG's liquidity needs and broader financial market concerns. We thank them for their leadership during this critical time for the global financial markets. We also thank Governor Paterson, Commissioner Dinallo, Commissioner Ario, the other state Commissioners, and the Office of Thrift Supervision for their willingness to assist AIG,” it said.