Shares in AIG are suspended after 74 per cent crash

Just a day after the bankruptcy of Lehman Brothers and the emergency rescue of Merrill Lynch, AIG - once the world's largest insurer - appeared to be on the verge of failure despite demands by its former boss Hank Greenberg that the American government save the company.

Many warned there was just one day left to save it from collapse. New York governor David Paterson said: "We are in a terrible situation if we let the world's largest industrial and commercial insurance company go down."

In emotional statements amid another panic-stricken share-trading session in New York, Mr Greenberg said AIG was a "national treasure" which could not be allowed to fail. Mr Greenberg - most of whose multi-billion-dollar fortune is tied up in AIG - said if it were allowed to go bankrupt it would cause a "systemic problem" for the US financial system.

Mr Paterson explained that without a major capital-raising deal to cover its liabilities and ensure the liquidity of its finances, AIG would not be able to benefit from the $20 billion lifeline thrown by state regulators late last night.

The lifeline only saw AIG plunge into further turmoil as major credit-rating agencies downgraded the firm. It means AIG - which has effectively been acting as the insurer to the US financial system - is unlikely to be able to pay out on insurance claims.

Analysts fear AIG, which employs hundreds in Britain from headquarters in Croydon, is all but finished. It is as important to the US as the country's biggest bank, Citibank.

Credit Suisse analyst Thomas Gallagher said: "While there is a chance the company can work its way through its liquidity problems if it can secure substantial bridge financing, we think this will be challenging to execute."

Rating agencies Standard & Poor, Moody's and Fitch expressed grave fears over AIG's massive exposure - hundreds of billions of dollars - to the collapsed US sub-prime housing market and failing financial institutions like Lehman Brothers. In Britain, AIG sponsors Manchester United, insures cars, homes and pets and offers life insurance through its AIG Direct company. It also acts as a major commercial insurer.

Ken Lewis, chief executive of the Bank of America, which yesterday rescued Merrill Lynch, said: "I don't know of a major bank that doesn't have some significant exposure to AIG."

It is AIG's involvement in the US housing market and the complex web of insurance for mortgages sold to Americans that has sent it into crisis.