NEW YORK - American International Group Inc has made tangible progress on its restructuring plan and will likely be able to repay the government's loan and much of its preferred equity stake, Moody's Investors Service said on Monday.

The restructuring plan still relies heavily on government support, but if AIG's operations and global financial markets continue to stabilize, the company can likely generate enough value to repay the government, Moody's said in a statement.

AIG, the giant insurer bailed out by the U.S. government, posted its second straight quarterly profit last week, helped by a recovery in the value of its investments, though its underlying business remained weak.

The quarterly results show continued stabilization of the core insurance operations despite challenging market conditions, Moody's said.

With the government now likely to recoup its investment, it has incentive to continue supporting AIG and its various creditors, Moody's said. The agency affirmed AIG's long-term rating of A3, the seventh-highest investment grade, with a negative outlook.

Credit spreads on AIG's 8.25 percent notes due in 2018 tightened by 15 basis points on Tuesday to 751 basis points over U.S. Treasuries, according to MarketAxess.

AIG has received up to $180 billion of federal aid, including more than $80 billion in loans, and is now 80 percent owned by U.S. taxpayers. The company has sought to sell off major assets to help repay the government but has struggled to find buyers willing to pay enough.

Since the appointment of Robert Benmosche as chief executive in August, AIG has focused on rebuilding the value of some businesses that had previously been slated for sale, Moody's noted.

We believe that the slower approach to restructuring could help AIG to generate more favorable values from its business portfolio than would be the case under rushed asset sales, Moody's said.

(Reporting by Dena Aubin; editing by W Simon)

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