NEW YORK (Bloomberg) — American International Group Inc., the bailed-out insurer, agreed to pay $725 million to settle a lawsuit by investors as it seeks to resolve a backlog of litigation and repay the US government.

AIG said it may sell common stock to raise $550 million of the total, according to a regulatory filing yesterday. If the New York-based company is unable to raise that sum, the agreement may be terminated.

"If you had to do it, now would be the time to do it," Optique Capital Management analyst William Fitzpatrick said, referring to a share sale. Milwaukee-based Optique oversees $800 million and doesn't own AIG shares. "There are plenty of funds available that want the issue; the question will be under what kind of terms."

Chief executive officer Robert Benmosche is settling with investors who lost money when the insurer's stock plunged amid a 2004 investigation by then-New York Attorney General Eliot Spitzer into bid rigging and faulty accounting. The insurer agreed in November to settle legal disputes with former CEO Maurice (Hank) Greenberg, who was ousted in 2005. AIG said in a November 6 filing it faced more than a dozen lawsuits and probes.

The suit covered by yesterday's agreement was filed by plaintiffs including public pension funds in Ohio, New Mexico, Mississippi and California. They claimed AIG fraudulently inflated results, causing the share price to plummet when the deception was uncovered. Under the settlement agreement, AIG will pay $175 million within 10 days of preliminary court approval.

"The key here is for the company to go forward and make money and do business and have issues dealing with supervisors and shareholders all in the past," said Ernest "Ernie" Patrikis, a partner at White & Case and a former general counsel at AIG. "It's another major impediment behind them."

AIG settled with Spitzer and federal regulators in 2006, agreeing to pay $1.64 billion.

The insurer was forced in September 2008 to take a government bailout that swelled to $182.3 billion, giving the US a stake of almost 80 percent. If AIG raises at least $550 million through a share sale to repay the US government, that will trigger a full payment of yesterday's settlement, according to the filing. Andrew Williams, a spokesman for the Treasury Department, had no immediate comment.

"We are pleased to have resolved this matter," AIG spokesman Mark Herr said in a statement. "This settlement ends a long-standing lawsuit, allowing AIG to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise for the benefit of all our stakeholders."

A share sale would be the first for AIG since May 2008, when it needed funds to cushion losses tied to bad bets on sub-prime mortgages. The stock has risen 19 percent this year, outpacing the 4.5 percent decline in the Standard & Poor's 500 Index.

AIG declined $1.74 to $35.64 on Friday in New York Stock Exchange composite trading. That compares with $767.40 on May 12, 2008, when the last offer priced, according to data compiled by Bloomberg.