NEW YORK (Reuters) - Embattled insurer American International Group Inc received New York state approval to post $20 billion of policyholders’ assets as collateral as it seeks to stave off a liquidity crisis and works with banks to fix its problems.

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Under the plan, AIG will be permitted to shift the funds from its insurance subsidiaries to the parent company, New York State Governor David Paterson told a press conference.

AIG worked with New York officials, including New York Insurance Superintendent Eric Dinallo, through the weekend seeking ways to shore up capital after rating agencies threatened downgrades.

The New York Federal Reserve said it was hosting meetings with banks and the U.S. Treasury Department to discuss a plan for AIG. A source familiar with the matter told Reuters that the New York Fed has hired Morgan Stanley to advise it.

AIG shares were down 58 percent.

The company had been in talks with billionaire investor Warren Buffett’s Berkshire Hathaway, but those talks have ended, a person familiar with the matter told Reuters.

Neither AIG nor Berkshire returned calls seeking comment.

AIG has posted losses totaling $18 billion over the past three quarters on guarantees it wrote on mortgage-linked securities.

Paterson said he had worked with AIG in a bid to help save New York jobs. The insurer employs 6,000 in Manhattan and 8,600 statewide. Paterson added that the plan was carefully crafted to pose no risk to New York taxpayers.

“New York would like to maintain them (AIG) if we can as they are critically important to us,” Paterson said at the press conference.

AIG is scrambling in the wake of one of Wall Street’s worst ever days ever, with Lehman Brothers Holdings Inc filing for bankruptcy and Bank of America Corp agreeing to take over Merrill Lynch & Co Inc.

AIG shares fell to $5.05 on the New York Stock Exchange after earlier touching $3.50. The shares have fallen 80 percent this year and closed Friday at $12.14.