The U.S. government may agree to finance the purchase of some American International Group Inc businesses and take direct stakes in others, a person familiar with the matter said on Thursday.

The wide range of options under discussion between the insurer and the government and credit rating agencies includes possible moves to cut the dividend or interest rate AIG now must pay as a condition of a massive taxpayer bailout.

AIG is looking to avoid a credit downgrade that would trigger a host of liquidity issues and further hurt its business, the source said, on condition of anonymity.

The talks come as AIG, once the world's largest insurer by market value, expects to post a record $60 billion quarterly loss, another source said earlier this week. That is equivalent to about $460,000 a minute.

We continue to work with the U.S. government to evaluate potential new alternatives for addressing AIG's financial challenges, AIG spokesman Joe Norton said, without elaborating.

The U.S. Federal Reserve declined to comment, while the Treasury Department did not respond to a request for comment.

AIG has been trying to sell assets to pay back the U.S. government after a bailout last year that swelled to about $150 billion, but it has been difficult to find buyers and get a good price for assets.

Loans for deals remain difficult to arrange due to the credit crisis and many would-be buyers are struggling with their own problems.

AIG was in talks to sell its U.S. auto insurance unit to Swiss insurer Zurich Financial Services AG in a deal that was expected to be worth around $2 billion, but the transaction has run into problems, another source told Reuters on Wednesday.

ASSET SALES

Bids for AIG's Asian assets are due on Friday, according to other sources, who spoke with Reuters earlier this week on condition of anonymity.

The major Asian assets on the block are AIG's American Life Insurance (Alico), a unit that generates more than half of its revenue from Japan, and a 49 percent stake in Hong Kong-based life insurance group American International Assurance Co (AIA).

The AIA sale process has been hampered by weakening economic conditions and suitors dropping out, though hope of China's interest in the asset was rekindled by an official on Thursday.

Any bids by Chinese companies would be solely a corporate decision, said Li Kemu, vice chairman of the China Insurance Regulatory Commission, suggesting that Beijing would not block involvement by a Chinese company.

Asked whether China Life <2628.HK> or Bank of China <601988.SS> might bid for the insurer's assets, Li said Chinese companies were speaking with AIG about a possible deal.

The discussion is still going on, and we are paying high attention to it, Li said.

On the sale of Alico, insurance companies Axa SA and MetLife Inc have expressed an interest, sources have said. They appear to be the most likely bidders, though the sources, who asked not to be named, could not say how much the companies were willing to bid.

MetLife made a preliminary offer of $11.2 billion, media reports have said, though they have also said that the offer may drop to $8 billion given the deterioration in the business.

In the Philippines, Italian insurer Assicurazioni Generali has presented an offer to acquire AIG's life insurance assets, a financial source said on Thursday.

AID TERMS

One idea being discussed with the U.S. government is that AIG is too big and unwieldy, and some businesses may be more valuable outside the company than inside it, said the source who is familiar with the talks.

Under one scenario, there could be a debt-to-equity swap, where the U.S. government would take a stake in businesses like Alico, AIA and AIG's U.S. auto insurance unit, and reduce AIG's debt. But the valuation of the businesses is unclear.

The company may also hand the government its business that insures corporate clients, Bloomberg reported on Thursday. The business, which was initially to stay within AIG, has suffered as employees left to go to rivals, the report said.

Other options explore possibly altering terms of the government aid, such as changing terms of a $40 billion preferred stock investment that has a 10 percent coupon, the source said. New terms could include reducing or even eliminating that dividend.

AIG and the government are also looking at the possibility of lowering the interest rate on the government's credit line to AIG, the source said.

AIG may also get an additional equity commitment of several billion dollars from the United States, which could come as an expanded credit line, the source said.

Separately, Federal Reserve Vice Chairman Donald Kohn is due to testify about AIG before the Senate Banking Committee on Thursday, March 5, the central bank said.

(Editing by Lincoln Feast, Toni Reinhold)

(For more M&A news and our DealZone blog, go to http://www.reuters.com/deals)

Japan China