New York Governor David Paterson said he had called on regulators "to provide the authorization, such that AIG can access $US20 billion of its assets through its subsidaries for the purpose of posting these assets as collateral".
Mr Paterson assured reporters at a press conference that the company was financially sound but "right now they are having a liquidity problem as they need immediate access to capital".
The lifeline failed to impress investors though as AIG shares plunged some 61 per cent on the share market on Monday, losing some $US20 billion in market value. In just a year, the group has lost 93 per cent of its value and is only worth some $US12.8 billion.
It has primarily been shaken by fears that it could be the next domino to fall in the worst banking crisis to shake Wall Street since the Great Depression.
AIG, saddled with toxic mortgage-backed derivatives and facing the imminent threat of a ratings downgrade, has reportedly turned to the US Federal Reserve for $US40 billion in bridge financing, according to the New York Times.
It would be a desperate attempt to stave off the same type of liquidity crisis that has felled Bear Stearns and Lehman Brothers, which filed for bankruptcy protection on Monday.
"I want to underscore the fact that no taxpayer dollars are involved. This is not a government bailout. It is simply giving AIG in effect the ability to provide a bridge loan to itself," Mr Paterson stressed.
And he said he had asked his superintendent of insurance, Eric Dinallo, to hold talks with the Federal Reserve "about the possible ability of the Federal Government to be involved in some type of arrangement."
One analyst at a major French bank, speaking earlier on condition of anonymity, said: "I can't imagine the Fed letting AIG fail".
The Federal Reserve from New York confirmed it had held a meeting about the AIG crisis with representatives from the state, the treasury and "a group of financial institutions" whose members were not disclosed.
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