NEW YORK (Bloomberg) - Ambac Financial Group Inc., the first bond insurer to lose its AAA credit rating amid the mortgage market collapse, rejected an offer by billionaire Warren Buffett to hand over control of the company's municipal-bond business.

The proposal by Berkshire Hathaway Inc. to take over $800 billion of municipal-bond guarantees from Ambac, MBIA Inc. and FGIC Corp. would not free up enough capital, according to an e-mailed statement from Ambac spokesman Peter Poillon. The proposal would have required New York-based Ambac to pay Mr. Buffett about $4.5 billion to assume the obligations.

The proposal is not "in Ambac's interest or the interest of all of Ambac's policyholders", Mr. Poillon said. Ambac is among five companies struggling to maintain its top bond-insurance ratings after widespread downgrades on sub-prime mortgage-linked securities that the companies guaranteed. On January 18, Fitch Ratings cut Ambac Assurance Corp. to AA from AAA after the company put off plans to raise equity capital.

"Ambac continues to vigorously pursue various alternatives for taking our franchise forward to the benefit of all of our policyholders," Mr. Poillon said in the statement.

Ambac, MBIA and other bond insurers including Bermuda-based Security Capital Assurance, are reelingfrom guaranteeing structured-finance products including mortgage-liked securities.