Washington - The US Federal Reserve Board late Tuesday announced that it would lend up to 85 billion dollars to embattled insurance giant American International Group (AIG).

In a move to calm financial markets fearing a possible second major Wall Street bankruptcy this week, the Fed engineered an AIG bailout through a two-year loan that gives the government a stake of 79.9 per cent in the conglomerate.

"The board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance," the Federal Reserve said in a statement.

Hours earlier, the rate-setting central bank have voted against loosening monetary policy despite Monday's massive bankruptcy of venerable investment bank Lehman Brothers and AIG's desperate search for financing to keep itself afloat until it can raise cash by selling off assets.

The government loan's purpose is "to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy," the Fed said.

"The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries."

The Federal Reserve said that it expects the loan to be paid off from cash raised by the sale of AIG assets. As part of the deal, the government gains veto power over dividend payments to common and preferred shareholders. (dpa)