Ambac Financial Group Inc said on Wednesday that the statutory capital of its main unit was well above a regulatory minimum at the end of the third quarter, easing concerns the company would fall short of funds and risk being taken over by state officials.

Ambac shares soared 44 percent to $1.01 during the regular session on the New York Stock Exchange and were a penny higher in late trading after Standard & Poor's said it could raise some ratings.

Ambac said statutory capital for Ambac Assurance Corp was $856 million. That is many times more than the minimum capital base of $2 million required of bond insurers by the insurance regulator for Wisconsin, where the company's bond insurance unit is based.

Regulators can seize a company when capital -- a surplus of assets over liabilities -- sinks below regulatory minimums.

Ambac fights on to live another day, another quarter and perhaps beyond, Hexagon Securities analyst David Havens said after the disclosure.

Ambac said it benefited from several factors, including $311 million from reinsurance payments, and its ability to commute, or cancel, four asset-backed securities derivative contracts that had been worth more than $5 billion, for cash payments of $520 million.

The company also expected to receive $440 million in tax refunds as a result of new legislation. This should give AAC's regulatory capital a boost in the fourth quarter, said Ambac.

Later on Wednesday, S&P said it lowered the counterparty and financial enhancement ratings on Ambac Assurance Corp to 'SD' (selective default) because it viewed the commutations as distressed exchanges. But the ratings firm added that the $520 million in payments was substantially less than the losses it expected and it expects to raise these ratings in the near future, most likely to the 'CCC' category.

Like larger rival MBIA Inc , Ambac has struggled to write new business since it lost top-notch ratings last year and has continued to struggle with derivatives losses, including losses tied to repackaged residential mortgage debt.

Ambac, once the No. 2 U.S. bond insurer, warned on November 10 that bankruptcy could be an eventual possibility, based on projections that it could run out of liquidity by the second quarter of 2011.

After Ambac's announcement, the cost to insure the company's debt narrowed, although the rates show investors still believe there is significant risk.

Credit default swaps on Ambac Assurance fell around 6 percentage points to 73.5 percent the sum insured as an upfront cost, or $7.35 million to insure $10 million in debt for five years, plus annual payments of $500,000, according to Phoenix Partners Group.

(Reporting by Lilla Zuill and Karen Brettell; editing by Lisa Von Ahn, Tim Dobbyn and Andre Grenon)