* Deal reduces one loan by more than half, to $17 bln

* Pact positions units AIA and Alico for IPO or sale

* Sees $5.2 bln charge in Q4 from transaction

* Shares rise more than 11 percent (Recasts, adds background, share activity, NEW YORK dateline)

NEW YORK, Dec 1 (Reuters) - Bailed-out insurer AIG said on Tuesday it had closed a pact with the New York Federal Reserve that slashes its debt under a credit facility by more than half, to $17 billion.

The deal is a big step in American International Group Inc's (AIG.N: Quote, Profile, Research) efforts to repay loans from a massive taxpayer bailout, and also moves it closer to spinning off two big life insurance units, which could bolster its financial position further.

AIG said that as of Dec. 1, the outstanding principal balance owed to the New York Fed, from loans received as part of the 2008 bailout, had been reduced to $17 billion. That compares with an outstanding balance of about $45 billion last week, including interest and fees.

AIG shares rose more than 11 percent to $31.72, partly reversing a steep fall in the stock on Monday after investors were spooked by concerns over a possible shortfall in reserves for non-life insurance claims.

The debt reduction is the result of a deal first announced last March to give the New York Fed a preferred stake in two of AIG's biggest life insurance units, American Life Insurance Co (Alico) and American International Assurance (AIA), effectively swapping debt for equity.