A rift between AIG and Maurice Hank Greenberg, former head of the ailing insurer, raised questions in 2005 about a decades-old compensation plan funded by a private affiliate, Greenberg told a federal jury on Thursday.

Greenberg, giving testimony in U.S. District Judge Jed Rakoff's Manhattan courtroom, said as antagonism grew AIG's board raised objections to Starr International continuing to fund deferred compensation for top managers.

Greenberg, chairman of privately held Starr International, was ousted from AIG in March 2005 amid allegations of accounting irregularities, but held on to a large block of AIG stock.

A bitter tug-of-war over those American International Group Inc shares ensued.

It was unlikely that the board would want to continue the (compensation) plan unless they controlled Starr International which was intolerable in the view of voting shareholders, Greenberg said, referring to voting Starr shareholders.

According to minutes of a Starr International meeting in July 2005 shown to the court, the parties had mutually agreed to suspend the compensation plan, which had enriched several hundred AIG employees over the previous 35 years.

AIG is suing Starr International to reclaim the proceeds of stock sales since Greenberg left the insurer, and for the return of more than 185 million AIG shares that Starr International still holds.

A key witness in the dispute between Starr International and AIG, Greenberg, 84, was grilled by Ted Wells, the lawyer for his former company, for the third straight day.

Wells told the court that since Greenberg and AIG's bitter parting four years ago, Starr has sold millions of AIG shares for between 80 cents a share and $67 a share for a total of about $4.3 billion.

AIG contends the shares were pledged to fund the deferred compensation plan for selected employees. Starr disputes that, saying the beneficiary of the shares was always a charitable trust.

Greenberg built AIG over 38 years into the world's largest insurer. Until the U.S. government's $180 billion bailout of AIG last September, Starr was the insurer's largest shareholder.

AIG says, subject to approval, it would use the $4.3 billion to repay taxpayer debt from its bailout.

Judge Rakoff ruled on Monday that investigations surrounding Greenberg's ouster, the U.S. government's bailout and controversial bonuses to AIG executives could not be brought up at the trial, saying the matters were irrelevant to the case at hand.

The case is: American International Group v Starr International Company Inc 05-6283 in U.S. District Court for the Southern District of New York (Manhattan).

(Reporting by Lilla Zuill, editing by Matthew Lewis)

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