US authorities have pieced together an emergency $85bn rescue of insurance company American International Group Inc to stave off a bankruptcy that could have thrown world markets into deeper turmoil.

AIG's rescue calls for the US Federal Reserve to lend up to $85bn to AIG for two years in exchange for a 79.9% equity stake.

It comes just two days after US authorities refused to bail out investment bank Lehman Brothers Holdings Inc, forcing it into bankruptcy court despite pleas from Wall Street's chiefs.

AIG will pay interest at a steep 8.5 per centage points above the three-month London Interbank Offered Rate, making the current rate equal to about 11.4%.

That gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly.

The Independent