Stocks in the United States slid to 12-year lows on Monday after a record loss of $US61.7 billion for AIG.
The Dow Jones industrial average recorded its first close below 7,000 since May 1997.
Selling of financial, energy and industrial stocks also briefly drove the S&P below 700 during the session for the first time since October 1996.
The Dow slid 299.64 points, or 4.24%, to 6,763.29.
Standard & Poor's 500 Index fell 34.27 points, or 4.66%, to 700.82. The Nasdaq Composite Index shed 54.99 points, or 3.99%, to 1,322.85.
Shares of AIG ended flat at 42 cents on the New York Stock Exchange.
The government will now provide up to an additional $30 billion in new capital for the insurance group, which has already received a commitment for $US150 billion in government aid.
Last week, the government announced it would boost its equity stake in Citigroup to bolster the bank's capital base. Citigroup's stock sank 20% to $US1.20.
The Dow has lost almost 23% since the start of 2009, while the S&P 500 is down more than 22%.
Comments by billionaire investor Warren Buffett, who said "the economy will be in shambles throughout 2009", further dampened investor confidence.
Trading was active on the New York Stock Exchange, with about 1.98 billion shares changing hands - above last year's estimated daily average of 1.49 billion.
About 2.31 billion shares were traded on the Nasdaq - above last year's daily average of 2.28 billion.