American International Group Inc, the world's largest insurer, on Monday disclosed that its auditors questioned the company's internal controls over its valuation of derivatives, sending its shares down more than 11 percent.

The disclosure cast doubt on AIG's past contention that it didn't face major problems stemming from the credit crisis that has slammed other financial institutions.

PricewaterhouseCoopers, the company's outside auditors, concluded that the company had a material weakness in its internal control over financial reporting relating to the fair valuation of credit default swap portfolio obligations of AIG Financial Products Corp, the company disclosed in a regulatory filing.

AIG has not yet determined how much the value of AIG Financial's super senior credit default swap portfolio had declined as of Dec 31, 2007, the company said.

It disclosed that earlier estimates had included an adjustment for cash flow diversion. However due to difficult market conditions it will not include the adjustment in determining the fair value of AIGFP's super senior credit default swap portfolio.

In October and November, the cumulative decline in net valuation of cash flow diversion totaled $4.88 billion.

AIG shares were down $5.70, or 11.3 percent, at $44.98 in morning trading on the New York Stock Exchange. (Reporting by Lilla Zuill, editing by Mark Porter)

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