UPDATE 1-Likely buyers of AIG assets face capital snags: UBS

(Changes source, adds analyst's comments, background)

Oct 31 (Reuters) - Potential buyers of American International Group Inc's (AIG.N) assets are facing capital pressures due to the deterioration in the credit and equity markets, analysts at UBS said as they downgraded the stock to "neutral" from "buy."

"Ongoing credit/equity market deterioration is placing capital pressures on competing insurers' ability to purchase AIG assets, thereby inhibiting quick asset sales and repayment of the Fed loan and diminishing potential asset sale proceeds," analysts wrote in a note to clients.

On Thursday, AIG reduced the amount it owes under a U.S. Federal Reserve credit line by $6.8 billion, but only by borrowing from a different government lending program.

AIG currently owes $83.5 billion under two emergency facilities from the Fed, which were necessary to prevent the company from filing for bankruptcy. That figure was $90.3 billion a week ago.

"Until AIG successfully executes its strategy, the value of its retained businesses, especially commercial property and casualty, erodes due to talent-poaching, client attrition and aggressive pricing/underwriting," the analysts said.

Analysts Andrew Kligerman, Julie Oh and Brian Meredith -- who recently cut AIG's third-quarter outlook mainly to reflect the Fed loan interest/commitment fee costs and marks on credit-default swaps (CDS) -- said third-quarter will likely be worse than expected.

There is little visibility on AIG's earnings outlook given uncertainty around asset sales pricing and timing, business erosion, CDS marks, and ultimate repayment of the Fed loan, the analysts said.

They cut their price target on the stock to $1.70 from $5.

Shares of AIG were trading down more than 2 percent at $1.59 in morning trade on the New York Stock Exchange. (Reporting by Tenzin Pema in Bangalore; Editing by Jarshad Kakkrakandy)