NEW YORK, (Reuters) - American International Group Inc's shares fell to their lowest point in nearly 10 years after it said its recent issue of equity and debt is expected to raise about $20 billion, far more than initially expected.

AIG shares fell 83 cents, or 2.1 percent, to $38.12 in New York Stock Exchange composite trading, the lowest since October 1998. Investors were concerned over the dilutive effect of the capital-raising and fearful that the company will post more losses on the mortgage-linked assets that have driven two quarters of record red ink.

AIG, the world's largest insurer, raised $13.4 billion last week — far more than the $7.5 billion originally planned — through the sale of 196.7 million common shares at $38 each and 78.4 million equity units at $75 each.

"We anticipate this capital raise will be roughly 8 percent dilutive to AIG's annualised earnings per share," Lehman Bros analyst Jay Gelb wrote in a research note.

Merrill Lynch cut its view of AIG's earnings for 2008 and 2009, citing dilution from the capital raising. It lowered its 2008 view to $2.30 a share, and for 2009 to $5.50 a share, 35 cents below its earlier estimate.

The balance of AIG's $20 billion capital raising is coming from sales of fixed-income securities being sold in various currencies.

"We believe it would have made more sense to suspend the annual dividend expense of $2.2 billion and reduce the capital raised to minimise dilution to shareholders," Lehman's Gelb wrote. AIG raised its dividend by 10 percent earlier this month as it reported a record first-quarter loss of $7.8 billion.

AIG chief executive officer Martin Sullivan, addressing a Lehman-sponsored investor conference in London, said the capital boost would give AIG the ability to invest in and support future growth, and at the same time position the company for any further volatility in the credit markets.

CreditSights analyst Rob Haines told Reuters "it could be a couple quarters from now before we see the bottom" of the crisis in mortgage markets. "There is uncertainty over whether there is going to be more (mark-to-market write-downs)," he added.

AIG's quarterly loss was driven largely by write-downs of assets linked to sub-prime mortgage investments. The company recorded $20 billion in unrealised losses over the last two quarters on a credit default swap portfolio held by a financial products unit.

Sullivan's reputation with investors has been tarnished since AIG in February said its mark-to-market losses from these assets could be much worse than originally thought.

AIG's board has expressed support for Sullivan, who became CEO about three years ago.

Sullivan said AIG continues to analyse which investments are a good fit and will divest those that are not. He cited past sales of stakes in two Bermuda-based companies it helped found — reinsurer IPC Holdings Ltd. and insurer Allied World Assurance Holdings Ltd .

"No part of the portfolio is sacrosanct," he said.