UPDATE 1-Key U.S. senator opposes federal help for AIG

(Adds Shelby comments, background)

WASHINGTON, Sept 16 (Reuters) - The top Republican on the U.S. Senate Banking Committee said on Tuesday the federal government should not step in with financial help for insurance giant American International Group Inc (AIG.N).

Asked whether the government should provide a bridge loan or some other support for the company, which faces a liquidity crisis, Alabama Sen. Richard Shelby told reporters, "Absolutely not ... I hope that they will not bail out, or get a bridge loan, to AIG."

He added, "Where do you stop? Where do you draw the line?"

AIG shares were down sharply amid fears that it could be the next financial giant to succumb to a global capital crunch rooted in the collapse of the U.S. housing market bubble.

In afternoon trading, AIG shares were down 20.4 percent at $3.79. Some officials were speculating that the government might offer the company financial assistance out of concern that its failure could have wide economic consequences.

The government earlier this year engineered the buyout of troubled investment bank Bear Stearns by JPMorgan Chase & Co (JPM.N). More recently, it seized control of mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N), but refused to provide federal aid to rescue investment bank Lehman Brothers Holdings Inc LEH.N, which has filed for bankruptcy.

Shelby argued for limiting any further federal intervention and for the financial markets to work out their own problems.

"When they bailed out Bear Stearns, then Lehman Brothers I'm sure thought they would be fine," Shelby said.

"They drew the line in the sand on them (Lehman), but they haven't drawn the line as of yet on AIG -- and AIG's not even a bank.

"They're not regulated. They're an insurance company regulated basically by the state of New York. Are they important? Absolutely. Do they have a lot of good parts and are they all over the world? Absolutely.

"Could they fail without pain? No.

"But what do you bail out next? Will it be Ford Motor Co (F.N), General Motors (GM.N), Chrysler? ... How much money and risk does the taxpayer want to take on? I'll tell you, not a lot more."

He added, "I hope the Congress will not intervene in AIG or in any of these situations. The market ought to handle it." (Reporting by Kevin Drawbaugh; editing by John Wallace)