NEW YORK (Reuters) - American International Group Inc, which was rescued twice last year by the U.S. government, is in talks with authorities for more aid as it looks to post its largest-ever quarterly loss, a source familiar with the matter said on Monday.

AIG is expected to post a roughly $60 billion fourth-quarter loss, the source said.

The loss would be among the largest in corporate history, exceeding Time Warner’s $54 billion loss in 2002 and dwarfing the $24.5 billion loss AIG posted in the third quarter, when the government increased its rescue package for the troubled insurer to about $150 billion.

The latest round of talks with the government include the possibility of additional funds for the insurer and trading debt for equity, another source said.

The situation is fluid and other options are being discussed, this second source said, adding that it was unclear where the talks would lead.

AIG may also look to convert preferred shares held by the government into common stock, Bloomberg reported, citing an unnamed source.

The discussions are going on as U.S. authorities try to put out financial crisis fires on other fronts as well. Citigroup Inc, whose stock has been pounded by fears that the government may seize the bank and wipe out shareholders, is also in talks to give the government a larger stake, a person familiar with the matter told Reuters.

CNBC, which first reported AIG’s discussions, said the losses to be announced next Monday were due to writedowns on commercial real estate and other assets. It said the insurer’s board will meet next Sunday to work out an agreement with the government.

In case they do not reach a deal, AIG’s lawyers at Weil, Gotshal & Manges LLP were preparing for the possibility of bankruptcy, CNBC said.

But the first source told Reuters that while AIG has retained Weil Gotshal, the insurer has no plans to file for bankruptcy.

AIG said in a statement it had not yet reported results and would provide an update when it does so in the near future.

“We continue to work with the U.S. government to evaluate potential new alternatives for addressing AIG’s financial challenges,” AIG said.

U.S. Treasury officials declined to comment. Weil could not be reached immediately for comment.

The logo of American International Group (AIG) is seen at their offices in New York, September 18, 2008. REUTERS/Eric Thayer

AIG shares closed down 1 cent to 53 cents on the New York Stock Exchange on Monday.

AIG was first rescued in September after bad mortgage bets left it on the verge of collapse. The government stepped in with $85 billion in bailout financing, as the credit crisis peaked with Lehman Brothers Holdings Inc filing for bankruptcy and Merrill Lynch agreeing to be bought by Bank of America Corp.

The rescue swelled in November as AIG posted its then largest-ever loss, hurt by writedowns on assets linked to subprime mortgages and capital losses. The Federal Reserve and U.S. Treasury stepped in with even more money to buy mortgage assets that had left AIG deeply in the red, and eased the terms of its loan repayment.

AIG has said it plans to sell all assets except its U.S. property and casualty business, foreign general insurance, and an ownership interest in some foreign life operations, as it looks to raise money to pay back the government.

(Editing by Richard Chang, Jeffrey Benkoe and Tim Dobbyn)