American International Group Inc agreed to pay $725 million to settle a long-running securities fraud lawsuit led by three Ohio public pension funds, Ohio Attorney General Richard Cordray said on Friday.

The settlement resolves allegations of AIG's wide-ranging fraud from October 1999 to April 2005 involving anti-competitive market division, accounting violations and stock price manipulation, and brings the expected recovery for AIG shareholders to over $1 billion, Cordray said.

AIG would pay an initial $175 million within 10 days of preliminary court approval of the settlement.

AIG may fund the remaining $550 million through one or more common stock offerings.

(Reporting by Steve Eder and Paritosh Bansal. Editing by Robert MacMillan)