WASHINGTON, US - THE US Federal Reserve Board on Tuesday said the Federal Reserve Bank of New York will lend up to US$85 billion (S$122 billion) to the American International Group, in a plan aimed at saving the insurer from a 'disorderly failure' that could damage the global economy.

The Fed said under the two-year facility the US government will receive a 79.9 per cent equity interest in AIG and has the right to veto payment of dividends to common preferred shareholders in the deal, which has the full support of the Treasury Department.

'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 Fed said in a statement.

'The President supports the agreement announced this evening by the Federal Reserve,' said White House spokesman Tony Fratto. 'These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy.'

Earlier, Senator Charles Schumer confirmed on Tuesday the US government was on the verge of taking 'an unprecedented step' to rescue the teetering insurance company.

'The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times,' he said in a statement after meeting government regulators about the fate of New York-based AIG.

'Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse,' said the Democrat, a member of the Senate Banking Committee.

If AIG had failed, it could have triggered a wave of problems for banks around the world and opened the ugliest chapter yet of the financial meltdown that has slashed billion of dollars from global stock markets.

Earlier on Tuesday, Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Henry Paulson met with Senate Banking Committee Chairman Christopher Dodd, Senate Majority Leader Harry Reid and House Republican leader John Boehner to brief them on the government's options.

Mr Bernanke and Mr Paulson left the meeting without commenting.

'At the administration's request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration's views on the deepening economic turmoil and shared with us their latest proposals regarding AIG,' Mr Reid told reporters.

'The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets.' -- REUTERS, AFP.