The Treasury Department plans to sell $6 billion of American International Group stock and struck another deal for the insurer to pay down $8.5 billion more in obligations, taking a major step forward in an election year to unwind the unpopular crisis-era bailout.

AIG said the agreement with the government would allow it to pay down what it owed in a special purpose vehicle, AIA Aurora, and free up some of the company's collateral, including interests in aircraft lessor International Lease Finance Corp and Asian insurer AIA Group.

The special purpose vehicle was set up in December 2009 in exchange for a reduction in the debt that AIG owed the New York Federal Reserve.

Wednesday's announcements come as President Barack Obama, a Democrat, fights to win a second term in office and withstands attacks from Republicans for wasting taxpayer money.

Under the previous Bush administration and then Obama's government, Treasury used $182 billion in taxpayer funds to prevent AIG's stockpile of credit default swap contracts from infecting the global financial system.

The U.S. government still owns 77 percent of AIG. Once the company repays Treasury for AIA, the value of the government's stake would total about $41.8 billion, Treasury said in a statement.

AIG said it intends to repurchase up to $3 billion of its own stock once the Treasury's offering is priced. The U.S. government hired Citigroup Inc, Credit Suisse and Morgan Stanley to coordinate the offering.

AIG last traded at $29.45 a share on Wednesday, slightly above the break-even price of $29 per share.

Treasury also said AIG is expected to repay the $8.5 billion from the following sources:

* $5.6 billion in expected proceeds from AIG's recently announced sale of ordinary sales of AIA;

* $1.6 billion in expected proceeds from the Federal Reserve Bank of New York's final disposition of Maiden Lane II LLC securities announced on February 28, and

* $1.6 billion in escrowed cash proceeds from AIG's sale of its American Life Insurance Co subsidiary to MetLife Inc.

(Reporting by Doug Palmer and Rachelle Younglai, Editing by Gary Crosse and Bob Burgdorfer)