Feb. 22 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer in rescue talks with banks, soared in New York Stock Exchange trading on optimism the company may soon reach an agreement that would save its AAA credit rating and avoid losses on $556 billion of securities it guarantees.

The New York-based company rose 16 percent after CNBC Television said a deal between Ambac and its banks may be announced Feb. 25 or Feb. 26. A group of banks is preparing to inject $2 billion to $3 billion into Ambac, the Financial Times said. The money would be part of plan to split Ambac, the newspaper said.

The company is ``exploring capital-raising alternatives'' and has had discussions with ``various parties,'' Douglas Renfield- Miller, an executive vice president at Ambac, said in a telephone interview. He declined to elaborate.

A rescue that enabled Ambac to retain its AAA rating for the municipal and asset-backed securities guaranty units would help banks, the insurance company and municipal debt investors avoid losses. Banks stood to lose as much as $70 billion if the top rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated.

``It's been on the table for a while and if it happens it will certainly be a good thing for any bond insurer that gets a capital infusion,'' said Donald Light, a senior analyst covering insurance at Celent, a consulting firm in Boston.

Ambac spokeswoman Vandana Sharma didn't immediately return calls seeking comment.

Eight Banks

Eight banks including Citigroup Inc. and UBS AG formed a group to consider providing financing, a person familiar with the matter said earlier this month. Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG, were also involved, said the person, who declined to be named because details hadn't been set.

Ambac, down 88 percent in the past year, jumped $1.48 to $10.71 in New York trading. Ambac is also considering raising money from shareholders, the Financial Times reported.

The bond insurers and banks are working against the clock. Moody's Investors Service indicated it will decide whether to downgrade Ambac and Armonk, New York-based by the end of the month. A downgrade of all the insurers would cast doubt over $2.4 trillion of securities they back. Losses on the subprime- mortgage securities they guaranteed prompted the ratings companies to demand the insurers add more capital or face downgrades.

Ambac, which was already downgraded by Fitch, lends its credit rating to $376.6 billion of municipal and international bonds and $176.6 billion of structured finance debt, according to its Web site.

Dinallo Meeting

New York Insurance Superintendent Eric Dinallo last month arranged a meeting with banks to help avoid a downgrade of the bond insurers. Dinallo told a congressional hearing last week the companies may be forced to separate their municipal insurance business from their asset-backed guarantees.

``We continue to be engaged in and fully supportive of the bond insurers' ongoing efforts to resolve their current problems,'' Andy Mais, a spokesman for Dinallo, said in an e- mail.

FGIC, which lost its top rating at Moody's Investors Service last week, asked to be split in two to protect the ratings on municipal bonds it guarantees. MBIA yesterday said all bond insurers must eventually divide their businesses.

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: February 22, 2008 17:14 EST