American International Group Inc and the U.S. government are engaged in talks, as the troubled U.S. insurer faces massive losses due to writedowns on commercial real estate and other assets, according to a source and CNBC report on Monday.

AIG, once the world's largest insurer, is expected to post a loss of nearly $60 billion on Monday, when it reports its results, CNBC reported citing unnamed sources close to the company.

The talks with the government include the possibility of additional funds for the insurer and trading debt for equity, a source familiar with the matter told Reuters.

The situation is fluid, and other options are also being discussed, the source said, adding that it was unclear where the talks would ultimately lead.

AIG's board is meeting on Sunday to work out an agreement with the government, CNBC said.

In case they do not reach a deal, AIG's lawyers at Weil, Gotshal & Manges LLP were preparing for the possibility of bankruptcy, CNBC said.

AIG declined to comment.

AIG shares fell 7 cents, or 13 percent, to 47 cents on the New York Stock Exchange shortly before the close.

AIG, once the world's largest insurer, has already gone to the government twice for help. The government rescued the company in September after bad mortgage bets left it on the verge of collapse. The bailout swelled to about $150 billion in November when the Federal Reserve and U.S. Treasury stepped in with more cash to buy mortgage assets that had left AIG deeply in the red, and to ease the terms of its loan repayment.

(Reporting by Paritosh Bansal; editing by John Wallace, Richard Chang)

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