Insurance company assets are regulated to ensure policy holders are covered. But New York allowed AIG to "make a bridge loan to themselves," Gov. David Paterson said.

As the move was announced, AIG shares were already tumbling on Wall Street, falling nearly 50 percent in afternoon trading.

AIG, one of the biggest underwriters of complex debt deals known as credit default swaps, has appealed to the U.S. Federal Reserve for a massive loan in an attempt to avoid a credit downgrade that could result in bankruptcy, The New York Times reported Monday, citing anonymous sources.

AIG's desperate straits came to light during the weekend, when U.S. officials and Wall Street bankers were feverishly working to craft a rescue plan for New York investment bank Lehman Brothers, which was facing financial ruin from its exposure to the U.S. real estate credit crunch.

AIG's involvement in credit default swaps, which were dependent on a booming mortgage market, has forced it to raised $20 billion in financing this year to cover losses, the Times said.