Insurer AIG is set to report a $60 billion (42 billion pound) fourth quarter loss and take a $30 billion lifeline from the U.S. government to survive a crisis threatening some of the world's largest companies and crippling international trade.

Policymakers from Southeast Asia to Europe said they would not allow protectionism to further restrict the global movement of goods, which has slowed to a trickle as banks restrict lending in a desperate effort to conserve cash.

That has sent the cost of trade financing soaring, hitting export-dependent countries in Asia particularly hard. Data on Monday showed a further decline in China's manufacturing sector and sharp falls in South Korean imports and exports last month.

Facing the biggest quarterly loss in history, AIG's board on Sunday approved a new rescue package that also includes more lenient terms on an existing government investment in its preferred shares and a lower interest rate on a government credit line, two sources familiar with the matter said.


This would be the third time the government has had to step up to save AIG, once the biggest insurer by market value whose global reach may have made it too big to fail.

The government really does not have the option of letting AIG totally blow up, said Robert Haines, senior insurance analyst at CreditSights.

Hopefully, the third bailout will be the charm, he said. The counterparties on most of the book are (European) banks that would be hammered if the U.S. walked away.

With or without government help, financial firms are scrambling to improve their balance sheets hammered by investments in toxic debt products linked to the U.S. subprime mortgage market and rising bad debts.

Banking giant HSBC was preparing to launch an $18 billion rights issue, according to sources.

Hong Kong-listed shares of HSBC <0005.HK>, Europe's largest bank, were suspended from trade on Monday ahead of the expected rights issue announcement and the presentation of its 2008 annual results.

Other Asian stocks fell about 4 percent <.MIAPJ0000PUS> <.N225> on fears that more financial firms might need government support, with the AIG news coming hard on the heels of a new rescue plan for Citigroup .

The market has become increasingly concerned that the need for rescues is broadening to other major U.S. banks after Citigroup and AIG, said Kengo Suzuki, a currency strategist for Shinko Securities.


Problems were not limited to financial firms, with more evidence of bleak conditions for many manufacturers in Asia.

China's manufacturing sector deteriorated further in February but the pace of decline slowed for the third month in a row, a survey by brokerage CLSA showed on Monday.

The rise in the PMI and its orders indices is encouraging but, as with in January, caution is required in interpretation. Manufacturing activity is still contracting, only at a more moderate pace than at the end of 2008, said Eric Fishwick, head of economic research at CLSA.

Exports from South Korea fell 17.1 percent in February from a year earlier, data on Monday showed, declining for the fourth straight month. Imports tumbled 30.9 percent.

Fearing a rise in protectionism as international trade evaporates, European and Southeast Asian leaders on Sunday spelled out their blocs' commitments to coordinate policies to fight the crisis.

The European Union pledge of unity came at a summit intended to bridge differences over how to fight recession and to address fears that some countries could take steps that undermine the EU commitment to a single market and solidarity between members.

The Association of South East Asian Nations (ASEAN), holding a summit in Thailand on the same day, endorsed fiscal stimulus, monetary easing, access to credit and trade financing, and measures to stimulate domestic demand.

(Reporting by Reuters bureaus worldwide; Writing by Lincoln Feast; Editing by Tomasz Janowski)