American International Group and the U.S. Treasury scaled back plans for a share sale after the insurance company's stock posted a steady decline and closed near an 8-month low on Tuesday, a source familiar with the situation said.

The share sale, including the overallotment, is now expected to be around $10 billion, at the lower end of the $10 billion to $20 billion range sources had earlier forecast.

The U.S. government provided as much as $182 billion of support to AIG during and after the financial crisis, and the plan was to sell AIG back to the public at a handsome profit for taxpayers.

Now it is unclear whether Treasury will breakeven in the first share sale.

Right now they're in a very tough spot just because the stock price has moved the way that it has, another source familiar with the situation said earlier on Tuesday.

But there are investors who are willing to pay a fair price for the shares, that person added.

The full share sale, including shares sold by the Treasury and AIG, is expected to consist of 300 million shares and an additional 15 percent overallotment, or 45 million shares, the first source said.

At Tuesday's closing price, that values the share sale including the overallotment at $10.22 billion.

The offering is expected to account for about 20 percent of AIG's market value.

The source said 200 million of the shares and the full overallotment are expected to come from the U.S. Treasury, representing 15 percent of the Treasury's stake in AIG.

The source declined to be named as the information is not public.

Investors had expected the government would sell at least a fifth of its AIG position in the first sale, and even more if it could.

One large investor said this week it would not be surprising to see Treasury sell 25 percent or more of its 1.66 billion shares.

HIGH STAKES

The stakes are high for the U.S. Treasury, which owns 92 percent of AIG after bailing out the insurer multiple times during and after the financial crisis.

Selling shares at a loss would be a black eye for the Treasury, but the government is under pressure to exit its crisis-era investments in private companies and raise as much money as it can before it runs up against borrowing limits.

Hopes for a blockbuster AIG sale and a heady profit may have faded with the steady decline in the company's shares.

While AIG has been profitable two quarters running, the profits depended on asset sales.

The company still faces a slew of questions from investors and analysts about growth in its underlying businesses and its ability to compete without the support of the government.

AIG's board met on Tuesday night to decide whether or not to move ahead with the share sale, other sources said. The Treasury was concerned about the downward pressure on the share price, they said.

Earlier this year, some sources close to the process had expected AIG to raise at least $15 billion. Even that figure is lower than some numbers -- in the $30 billion to $40 billion range -- initially discussed when banks pitched in January to underwrite the offering.

Since then, AIG's shares have lost about a third of their value due to a warrant issue, and analysts have questioned the company's growth potential and heavy charges for legacy issues at property insurer Chartis and airplane lessor ILFC.

When the company's recapitalization closed in January, the Treasury was sitting on a paper profit of just over $27 billion, but that has been eroded to below $1.5 billion.

In that time, S&P insurance shares and the broader S&P 500 index both rose.

One source said this week the offering was likely to be at a discount to AIG's last closing price. That discount -- expected to be in the mid-single digits -- would suggest a price less than Treasury's $28.72-per-share breakeven point.

It was unclear on Tuesday how willing Treasury will be to dip below its breakeven price.

AIG has said it needs to raise $3 billion to satisfy the ratings agencies that it has the ability to tap capital markets.

If all of the remaining 100 million shares were to be sold by AIG, it suggests that AIG either expects the offering to price at $30 per share or better, in line with where sources have said AIG and Treasury officials see the stock -- or that it will ultimately end up selling more shares.

A source familiar with the situation said last week a final price could not be determined until the roadshow ends later this month, adding that the market price was a good guide for valuing the stock.

But one investor said this week that portfolio managers believe there would be demand somewhere between $23 and $25 per share. On an adjusted basis, the last time AIG traded as low as $23 was early March 2010.

AIG is scheduled to hold its annual meeting on Wednesday.

(Editing by Carol Bishopric and Vinu Pilakkott)

Aig Sale