May 28 (Bloomberg) -- American International Group Inc., the world's largest insurer, fell 4.9 percent in New York trading after Citigroup Inc. analyst Joshua Shanker said it may need more capital beyond the $20.3 billion already collected.

AIG may seek $5 billion to $10 billion rather than let its credit ratings be cut again and risk higher borrowing costs and lower sales, Shanker said yesterday in a research note. Standard & Poor's, Fitch Ratings and Moody's Investors Service downgraded New York-based AIG this month after the company posted a $7.81 billion first-quarter loss.

``The ramifications of another downgrade would be devastating,'' Shanker, who rates AIG ``hold,'' said in a note published after the close of regular U.S. markets. ``A downgrade would be so detrimental to AIG that it will not allow this to happen.''

AIG, the largest insurer by assets, announced last week that it completed a sale of debt and stock to replenish capital depleted after writedowns tied to the U.S. subprime market collapse caused two record quarterly losses. Banks and securities firms have raised or announced plans to seek more than $269 billion since July, according to Bloomberg data.

The company fell $1.78 to $34.84 in New York Stock Exchange composite trading at 10:56 a.m. AIG has declined 40 percent this year, making it the worst performer in the Dow Jones Industrial Average.

Spokesman Chris Winans declined to comment. AIG said last week that the company didn't anticipate needing to raise more cash. Executives said during a conference call this month that they chose to raise cash to add to AIG's cushion of excess capital.

`Weakened Confidence'

Chief Executive Officer Martin Sullivan has announced more than $19 billion of declines on contracts that protect fixed- income investors after reassuring shareholders in December that writedowns from the housing market would be ``manageable.''

``Recent material losses and the need to raise capital have weakened investor confidence in management,'' Shanker said. Sullivan will need to act quickly and decisively to manage AIG back to stability and profitability, he said.

The financial products unit that sold the guarantees is ``significantly undercapitalized,'' Shanker said in the note, and may subject AIG to future valuation declines. He lowered his price target on the insurer to $41 from $47.

AIG raised 62 percent more than the $12.5 billion the company said it needed on May 8, selling $7.47 billion in shares of common stock, $5.88 billion in equity units that can be converted into shares and $6.9 billion in fixed-income securities.

Seven analysts recommend investors accumulate shares of AIG, 11 say ``hold'' and none ``sell,'' according to Bloomberg data.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net.

Last Updated: May 28, 2008 11:00 EDT