UPDATE 1-Citigroup raises AIG to buy

(Recasts; adds details, share movement)

June 19 (Reuters) - Citigroup raised American International Group Inc (AIG.N) to "buy" from "hold," saying the insurer can be viewed as undervalued even if it fails to achieve growth, and the shares are poised for over 35 percent upside in the next 12 months.

The brokerage also raised its price target on the stock to $42 from $41.

The brokerage said in an extreme case, the company may post another $20 billion of credit default swap and investment losses.

"While AIG may have enough cash to support its current liquidity needs, the extreme case explores a $15 billion equity raise and suggests the current stock price can suffer such dilution," Citigroup said.

AIG raised more than $20 billion with the sale of equity, debt and convertibles, in the wake of posting a record $7.8 billion loss in the first quarter.

"We believe that further large-scale subprime and credit-related fluctuations are to be expected in the near-term through the company's capital markets unit, investment portfolio, consumer finance operations and mortgage insurance unit," Citigroup said.

"Nonetheless, we believe that AIG's diversification, strong cash flow and financial strength will provide some earnings protection. Still, we see deteriorating trends across the company's P&C (property and casualty) and life operations as well," it said.

Shares of the company were up 3 percent at $32.40 in trading before the bell, after closing at $31.52 Wednesday on the New York Stock Exchange. (Reporting by Supantha Mukherjee in Bangalore; Editing by Vinu Pilakkott)