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NEW YORK, Sept 24 (Reuters) - American International Group Inc's AIG.N shares fell sharply on Wednesday after the company finalized a deal that will put majority ownership in the hands of government.

Late on Tuesday, AIG said it had signed a “definitive” agreement for up to $85 billion in borrowings from the U.S. Federal Reserve, as part of a rescue by the central bank that will see it take a 79.9 percent stake in the giant insurer.

AIG shares were down 22 percent at $3.90 in afternoon trading on the New York Stock Exchange.

“AIG is essentially nationalized, in our opinion,” said Friedman, Billings, Ramsey analyst Bijan Moazami, in a research note.

The development almost certainly puts paid to investor hopes to thwart the government from taking majority ownership of the insurer, Moazami added.

A representative for an investor group that has been scrambling to work with AIG to raise funds to pay off the government before it exercises its option to take a large stake in AIG did not immediately return calls for comment.

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As part of the agreement, preferred stock will be held in trust for the U.S. Treasury, and convertible into common stock after a special shareholders’ meeting to amend the company’s certificate of incorporation, AIG said in a statement.

AIG Chief Executive Edward Liddy said agreeing to the government credit facility was “the company’s best alternative” in the current market environment.

But AIG made it clear that the deal with the government carries a heavy price. The giant insurer has to pay back the loan from, among other things, asset sales and new debt or share issues.

Not only will it pay 8.50 percentage points over 3-month LIBOR, putting the current rate at well above 11 percent, but it will also pay a commitment fee equal to about $1.7 billion.

AIG will also pay a fee on undrawn amounts of 8.5 percent a year. The interest and the fees will be added to the balance outstanding, the company said.

The Fed’s rescue plan for AIG was unveiled Sept. 16 amid the most tumultuous week in financial markets in recent memory, narrowly averting the insurer’s collapse under mounting mortgage losses. (Additional reporting by Jonathan Spicer, editing by Maureen Bavdek and Bernard Orr)