Global insurance giant American International Group (AIG) was last night racing to raise up to $50bn (£28bn) in extra capital as it became the latest victim of the sub-prime mortgage crisis.

Despite being thrown a $20bn lifeline by New York State Governor David Paterson, AIG was talking to various parties, including the US Federal Reserve, in a bid to reassure investors and customers.

AIG shares plunged 72% at one stage, as the wider markets continued to reel from the events of the weekend that saw Lehman Brothers file for bankruptcy protection and Merrill Lynch agree to be taken over by Bank of America.

Despite being the world's largest insurer with a $1,000bn balance sheet, AIG has been told by credit ratings agencies that it needs to raise $40bn to bolster its balance sheet or face damaging downgrades to its debt.

Such downgrades would cause problems for AIG because of the company's exposure to credit-default swaps, which are contracts sold to protect debt investors. A ratings cut would trigger collateral calls from debt investors who bought those swaps.

As a result, the company had been trying to raise up to $50bn in extra capital, although last night it seemed that the most it was likely to muster would be in the region of $40bn.

The day's dramatic events, referred to as "Meltdown Monday", saw hundreds of billions of pounds wiped off the value of stock markets around the world.

The Daily Telegraph