Shares in American International Group (AIG) fell 43 per cent in early trade on Wall Street last night amid early fears that a $94 billion rescue package might fail to materialise. The shares had fallen 60.8 per cent on Monday.

But the insurer’s stock regained to close down by 21 per cent as hopes of a bailout grew.

David Paterson, the New York Governor who is co-ordinating efforts to bolster the insurer, gave warning that the insurance giant had just one day left to resolve its financial problems before triggering “catastrophe”.

New York State also struck a deal allowing the insurer to borrow $US20 billion ($25 billion) of capital from its own subsidiaries, effectively loaning itself the money by shifting liquid investments from some of its regulated subsidiaries to the group.

AIG, once the world's largest insurance company, has 116,000 staff - four times more than Lehman Brothers, the US investment bank that filed for bankruptcy on Monday - and its collapse could have a cataclysmic effect on global markets.

The insurer provides cover against complex financial instruments going bust, including mortgage-backed securities.

As investment banks such as Lehman have written down billions of dollars worth of mortgage-backed assets, AIG's insurance payouts have soared, leaving the company scrambling for new capital.

Over the past nine months, AIG has reported $US18 billion worth of losses on guarantees that it wrote on mortgage-backed securities.

Shares in AIG plummeted as the Dow Jones industrial average opened overnight, when Standard & Poor's joined Moody's in cutting AIG's credit rating, making it even more expensive for AIG to raise new funding.

The US Federal Reserve had on Monday asked JPMorgan Chase and Goldman Sachs to organise loans of up to $US75 billion for AIG.

At the same time, the New York Governor said AIG had “a day” to solve its problems and a failure would result in a “catastrophic problem” for the market.