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The US government has stepped in to rescue insurer American International Group (AIG) with $85 billion in return for an 80 per cent stake in the firm.

The Federal Reserve decided to bail out AIG because "in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance," it said in a statement.

In other words, the US authorities feared a collapse of AIG would severely damage the US economy as a whole, a threat not seen from the bankruptcy of Lehman Brothers, where no state help was offered.

According to the Fed, the loan to buy AIG is expected to be repaid from the proceeds of the sale of the firm's assets.

The US government will receive a 79.9 percent equity interest in AIG as part of the deal and has the right to veto the payment of dividends to common and preferred shareholders.

"AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues," AIG's board of directors said in a statement.

"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."

Yesterday, AIG secured a $20 billion bridge loan after admitting it had serious liquidity problems.

The group's problems were made worse by three credit agencies slashing their ratings, making it difficult to attract investors.

Although the company has enough assets to sell to continue trading, analysts feared AIG would not have time to raise the funds before it would have to declare bankruptcy.