US government to rescue AIG in $85 billion bailout

New York: The United States government is expected to announce an $85 billion bailout of the huge insurer American International Group (AIG), people with knowledge of the situation said on Tuesday, in a bid to avoid further market upheaval.

The people said an announcement from the government about the plan was expected by 9:30 pm EDT (1330 GMT).

If AIG had failed, it could have triggered a wave of problems for banks around the world and opened the ugliest chapter yet of the financial meltdown that has slashed billion of dollars from global stock markets.

The people, who asked not to be named because of the sensitive nature of the negotiations, said bankers and federal officials had decided a government bailout of AIG was the best solution to save it from collapsing.

The plan would give the government the option to take control of up to 80 per cent of AIG, the people said. They said these steps would likely cause a change in top management at the New York-based insurance company, one of the world's largest.

Earlier, Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson met with Senate Banking Committee Chairman Christopher Dodd, Senate Majority Leader Harry Reid and House Republican leader John Boehner to brief them on the government's options.

Bernanke and Paulson left the meeting without commenting.

"At the administration's request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration's views on the deepening economic turmoil and shared with us their latest proposals regarding AIG," Reid told reporters.

"The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets."