UPDATE 4-Bearish bets on AIG surge after analyst warning

* Citigroup cuts AIG share price target

* Cites valuation concerns

* Bearish bets also hurt stock

* AIG shares close down nearly 28 pct
(Updates with closing options trading data)

By Supantha Mukherjee

BANGALORE, July 9 (Reuters) - Shares of American
International Group Inc (AIG.N) plummeted more than 27 percent
on Thursday after a Citigroup analyst said the value of the
troubled insurer's equity may fall to zero, and investors
stepped up their bearish bets.

AIG shares, which have fallen more than 50 percent since
the company's 1-for-20 reverse stock split on July 1, lost
$3.62 or 27.6 percent to close at $9.48 on the New York Stock
Exchange on Thursday.

Options traders bet overwhelmingly that the stock would
continue to fall, and grew more aggressive throughout the day.
By the close of trading, there were 138,000 put options traded
in AIG, almost eleven times normal levels, according to option
analytics firm Trade Alert.

"Some investors are anticipating more financial woes from
AIG which will keep the stock heading south. In the options
market traders are speculating that the downward trend will
continue, which has resulted in a lot of put buying in the
near-term July contracts," said William Lefkowitz, options
strategist at brokerage firm vFinance Investments.

AIG had hoped its reverse stock split would give the shares
a boost, but instead it seems to have opened opportunities to
short-sellers.

"After the reverse split, the stock is easier to borrow and
more people get access to short it when it is trading at a
higher price," said Paul Hickey, co-founder of Bespoke
Investment Group in Harrison, New York.

Citigroup analyst Joshua Shanker, in a note issued late on
Wednesday, said he believed "investors have come in on the
short side in anticipation of future financial losses."

Shanker slashed the target price he has on the stock to $14
from $36, citing the possibility of more derivatives losses and
erosion of equity value.

"Our valuation includes a 70 percent chance that the equity
at AIG is zero," said Shanker. "The higher probability reflects
risk of further (credit default swap) losses and management's
increased openness to disposing of businesses at low
valuations."

AIG has been the recipient of up to $180 billion in U.S.
bailout funds, after losses on credit default swap guarantees
sold by a financial products unit threatened to drive it into
bankruptcy.

The company is trying to reduce its exposure to losses on
such contracts, but Shanker said there could be more red ink
from guarantees sold to European financial institutions.

Last month, AIG revised its 2008 annual report to add a new
risk factor that shows it may recognize valuation losses on a
CDS portfolio with notional value of about $193 billion if
credit markets continue to deteriorate. [ID:nN29406743]

Shanker said despite AIG's efforts to reduce its
liabilities, and sell off businesses to pay down some $83
billion in taxpayer loans, the uncertainty and risk surrounding
AIG remain very real.
(Reporting by Supantha Mukherjee; Additional reporting by
Lilla Zuill in New York, and Doris Frankel in Chicago; Editing
by Himani Sarkar and Matthew Lewis)