UPDATE 1-Moody's cuts AIG ratings;S&P sees negative outlook

(Recasts; adds Moody's ratings cut)

NEW YORK, Oct 3 (Reuters) - Moody's Investors Service cut American International Group's debt ratings by one notch, citing the company's plans to sell assets to pay off debt, leaving the insurer with fewer businesses to rely on.

The downgrade could potentially boost AIG's borrowing costs, and left AIG, once the world's largest insurer by market value, with an "A-3" rating. That's the seventh highest out of 10 investment-grade levels.

AIG had top "triple-A" ratings as recently as 2005, but its ratings have dropped in recent years amid accounting scandals, questions about its mortgage exposure, and an $85 billion government rescue last month that is forcing the company to sell off assets to pay back its borrowings.

Standard & Poor's on Friday revised the outlook on its ratings of American International Group to "negative" from "developing," signaling that it is more likely to downgrade the company over the next two years.

S&P has an "A-minus" rating on AIG (AIG.N), four notches above speculative, or "junk" status.

AIG said on Friday it was focusing on its main insurance operations and put the rest of its businesses up for sale.

AIG's insurance operating units remain on review with a "developing" outlook, said S&P, signaling a ratings change of some variety is possible over the next two years.

The government's loan to AIG provides liquidity to meet short-term financing needs while AIG prepares the sale of various businesses.

"However, the $61 billion draw to date on the facility is much larger than we had previously anticipated, causing the scope of the planned business sales to exceed our expectations," S&P analyst Rodney Clark said in a statement.

S&P's revised outlook reflects the agency's concerns that AIG may have trouble executing on the plan, given the current disruption in credit markets.

The cost of insuring AIG debt against possible default tightened slightly Friday, although credit default swaps continued to trade at distressed levels.

CDS were trading at 27.5 percent upfront, or $2.75 million annually to insure $10 million for five years, plus annual payments of $500,000, according to Markit Intraday.

CDS trade upfront when default fears rise and sellers of protection want to be paid more at the outset of the contract. (Reporting by Ciara Linnane and Dan Wilchins; Editing by Dan Grebler, Richard Chang)