American International Group Inc agreed to pay $725 million to settle a long-running securities fraud lawsuit led by three Ohio public pension funds, in one of the largest class action settlements in U.S. history.

AIG would pay $175 million within 10 days of preliminary court approval of the settlement with a class of shareholders. The company may fund the remaining $550 million through one or more common stock offerings.

The litigation, which began in October 2004, involved allegations that AIG engaged in accounting fraud, bid-rigging and stock price manipulation, said Ohio Attorney General Richard Cordray, who represented the Ohio funds.

The settlement resolves allegations of AIG's wide-ranging fraud from October 1999 to April 2005 and brings the expected recovery for AIG shareholders to about $1 billion, Cordray said.

AIG said it was pleased to have resolved this matter.

This settlement ends a long-standing lawsuit, allowing AIG to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise for the benefit of all our stakeholders, spokesman Mark Herr said.

The class action suit was led by the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio and the Ohio Police and Fire Pension Fund.

As part of the overall case, the Ohio funds previously announced a $72 million settlement with General Reinsurance Corp, a $97.5 million settlement with PricewaterhouseCoopers LLP and a $115 million settlement with former AIG Chief Executive Maurice Hank Greenberg, other AIG executives and related corporate entities.

Cordray said together this was the tenth-largest securities class action settlement in U.S. history.

It comes a day after the U.S. Securities and Exchange Commission reached a $550 million settlement in a case against Goldman Sachs Group Inc .

That case stemmed from Goldman's marketing and packaging of a collateralized debt obligation that turned toxic during the financial crisis.

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