By Lilla Zuill

NEW YORK (Reuters) - Embattled insurer American International Group Inc received New York state approval to post $20 billion (11.2 billion pounds) of policyholders' assets as collateral as it seeks to stave off a liquidity crisis and works with banks to fix its problems.

Under the plan, AIG (AIG.N: Quote, Profile, Research) will be permitted to shift the funds from its insurance subsidiaries to the parent company, New York State Governor David Paterson told a press conference.

AIG worked with New York officials, including New York Insurance Superintendent Eric Dinallo, through the weekend seeking ways to shore up capital after rating agencies threatened downgrades.

The New York Federal Reserve said it was hosting meetings with banks and the U.S. Treasury Department to discuss a plan for AIG. A source familiar with the matter told Reuters that the New York Fed has hired Morgan Stanley to advise it.

AIG shares were down 58 percent.

The company had been in talks with billionaire investor Warren Buffett's Berkshire Hathaway, but those talks have ended, a person familiar with the matter told Reuters.

Neither AIG nor Berkshire returned calls seeking comment.

AIG has posted losses totalling $18 billion over the past three quarters on guarantees it wrote on mortgage-linked securities.