AIG is expected to post a roughly $60 billion fourth-quarter loss, the source said.

The loss would be among the largest in corporate history, exceeding Time Warner's $54 billion loss in 2002 and dwarfing the $24.5 billion loss AIG posted in the third quarter, when the government increased its rescue package for the troubled insurer to about $150 billion.

The latest round of talks with the government include the possibility of additional funds for the insurer and trading debt for equity, another source said.

The situation is fluid and other options are being discussed, this second source said, adding that it was unclear where the talks would lead.

AIG may also look to convert preferred shares held by the government into common stock, Bloomberg reported, citing an unnamed source.

The discussions are going on as US authorities try to put out financial crisis fires on other fronts as well. Citigroup Inc, whose stock has been pounded by fears that the government may seize the bank and wipe out shareholders, is also in talks to give the government a larger stake, a person familiar with the matter said.

CNBC, which first reported AIG's discussions, said the losses to be announced next Monday were due to writedowns on commercial real estate and other assets. It said the insurer's board will meet next Sunday to work out an agreement with the government.

In case they do not reach a deal, AIG's lawyers at Weil, Gotshal & Manges LLP were preparing for the possibility of bankruptcy, CNBC said.

But the first source said that while AIG has retained Weil Gotshal, the insurer has no plans to file for bankruptcy.

AIG said in a statement it had not yet reported results and would provide an update when it does so in the near future.

"We continue to work with the US government to evaluate potential new alternatives for addressing AIG's financial challenges," AIG said.

US Treasury officials declined to comment. Weil could not be reached immediately for comment.