AIG

ONG KONG/NEW YORK (Reuters) – Beleaguered U.S. insurance giant American International Group (AIG.N) may allow the U.S. government to take control of certain assets should the sale of stakes in various units fail to produce attractive offers, according to a source close to the matter.

Another option under discussion is for Washington to convert $40 billion worth of preferred stock into common shares, said the source, who was not authorized to speak on the record.

AIG, facing the prospect of a third round of government aid and the largest quarterly loss in U.S. corporate history, is trying to sell off assets to stay afloat and help pay back part of the $150 billion it borrowed after being driven to the brink of collapse last year.

Deadlines for bids for the Asian assets, sales of which could raise tens of billions of dollars for AIG, are due on Friday, according to sources. AIG is also selling off stakes in U.S. subsidiaries.

An AIG spokeswoman did not immediately respond to requests for comment.

The major Asian assets on the block are AIG's American Life Insurance (Alico), a unit that generates more than half of its revenues from Japan, and a 49 percent stake in Hong Kong-based life insurance group American International Assurance Co (AIA).

Analysts originally expected the units to fetch more than $10 billion each, but the value of the assets has likely fallen since the auction began. With the auction in its last phase, AIG has signaled it's willing to give up control of AIA, sources said.

The AIA sale process has been hampered by weakening economic conditions and suitors dropping out, though hope of China's interest in the asset was re-kindled by an official on Thursday.

Chinese firms' potential bids would be solely a corporate decision, said Li Kemu, vice chairman of the China Insurance Regulatory Commission, suggesting Beijing would not block involvement by a Chinese firm.