Shares of government-controlled insurer American International Group Inc rose Monday on hopes that the terms of its government bailout may be eased.

The rally was sparked by news that the leader of a key congressional committee has directed his staff to examine a proposal for another loan revision.

Rep. Edolphus Towns, a Democrat who chairs the Government Reform Committee, has told staff to take a look at the proposal from former AIG CEO Hank Greenberg, a committee spokeswoman said.

The proposal would cut the government stake in AIG from the current 80 percent and trim interest rates on AIG's government loan. It also would extend the term of the loan, giving the company more time to repay, the spokeswoman said.

She added that Towns is considering whether the proposal would buy AIG more time to avoid selling assets at fire-sale prices, which could improve the government's overall return on its bailout investment of more than $180 billion.

AIG shares were up $4.59, or 11.5 percent, to $44.50 in early-afternoon trading on the New York Stock Exchange.

Jon Najarian, co-founder of optionmaster.com, attributed the rise to the possibility of a fourth revision to AIG's bailout since the government rescued the insurer a year ago.

He said the bullish sentiment appeared to be driven by retail investors and day traders, with triple the normal volume taking bets that the shares could trade as high as $65 by next month.

Najarian said there were no signs that big institutions were involved in the surge in activity in the shares.

The Towns spokeswoman said the congressman has not yet spoken with the U.S. Treasury Department or the Federal Reserve about Greenberg's proposal.

AIG is open to constructive efforts by Mr. Greenberg or others that assist the company in restoring value to shareholders and repaying the taxpayer, AIG said in a statement.

Greenberg, who ran AIG for 38 years, has agreed to help the company's new CEO, Robert Benmosche, giving him advice on how to turn around what was once the world's largest insurer.

AIG was saved last September by a federal bailout that has since swelled to $180 billion.

The company has tried to sell assets to repay taxpayer loans of more than $80 billion, but so far it has raised net proceeds of only $4 billion, hampered by tight credit markets and buyers looking for bargains.

(Reporting by David Lawder and Lilla Zuill; editing by John Wallace)

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