American International Group should be allowed to go bankrupt because keeping it and other sick financials alive on government support risks ruining the US economy, legendary investor Jim Rogers told CNBC Tuesday.

AIG, whose $61.66 billion fourth-quarter loss was the largest ever for a US company, received $30 billion more in government funds Monday. The insurer's financial health hasn't improved despite getting as much as $150 billion from the government last year.

"Suppose AIG goes bankrupt, it is better that AIG goes bankrupt and we have a horrible two or three years than that the whole US goes bankrupt," Rogers said. "AIG has trillions of dollars of obligations, let them fail, let the courts sort it out and start over. Otherwise we'll never start over."

On Monday, CEO Edward Liddy told CNBC that the insurer is far more stable and secure than it was last fall but acknowledged that it was "difficult to say" if AIG will need even more money from the government in the future.

Bailing out the banks is going to increase the debt spiral and finally cause the destruction of the world's biggest economy, Rogers said.

"I think it's astonishing, they're ruining the US economy, they're ruining the US government, they're ruining the US central bank and they're ruining the US dollar," he said.

"You are watching something in front of our eyes, very historically, which is basically the destruction of New York as a financial center and the destruction of America as the world's most powerful country."

Japan's economic "lost decade" was caused by trying to bail out the banks, and the West risks running out of money if it doesn't let the bad banks fail now, Rogers warned.

Systemic risk is going to be the same in 10 months, 5 years of 10 years if the fundamental problem is not solved, he added.