NEW YORK (Reuters) - American International Group Inc. the world's largest insurer, has agreed to pay $1.6 billion to settle federal and state charges of accounting abuses, sources familiar with the matter said today.

As part of the settlement, the company will support legislative reform to end some of its previous practices, one of the sources said.

The widely anticipated settlement, which was expected to be announced at about 12 noon today, would be split nearly evenly between the. Securities and Exchange Commission and New York State authorities.

It ends a grueling chapter for AIG , but legal battles continue with the insurer's former chief executive, Maurice ?Hank? Greenberg.

The settlement will not cover a state lawsuit pending against Greenberg and AIG's former chief financial officer, Howard Smith, or any possible federal charges against the two men, sources said.

Greenberg, who was forced to resign last April, and Smith have denied any wrongdoing.

Under the settlement agreement, AIG will agree to business reforms, including a three-year hiatus on so-called ?contingent commissions? when selling certain kinds of coverage, the source said.

Contingent commissions are a well-established compensation arrangement in which brokers and insurers reward each other for steering business to each other.

Though a common industry practice, contingent commissions are seen by regulators as giving an unfair advantage to companies that pay them, since insurers are more likely to sell policies where they can make extra money. Such payouts by insurers to brokers for selling policies were the subject of a bid-rigging probe.

The settlement requires AIG to support legislation banning contingent commissions and to support greater disclosure of compensation to brokers and agents, the source said.

The AIG settlement ends a suit that was filed by New York State Attorney General Eliot Spitzer and the New York State Insurance Department in May. Also settling with AIG will be the SEC, which is expected to announce its charges and the settlement simultaneously.

AIG will pay $700 million in disgorgement to investors and $100 million in penalties to the SEC, which may choose to include that amount in the disgorgement, a source said.

About $375 million will compensate AIG policyholders who may have been injured by alleged bid-rigging of insurance contracts, and $344 million is expected to go to state workers' compensation funds, the source said.