Shares in American International Group (AIG) plunged by 18.25 per cent, putting them on course for their biggest one-day decline since the October 1987 stock market crash.

The sharp decline came as the world's biggest insurer refused to rule out the issue of new shares that would dilute the ownership of its existing investors.

The shares were also reacting to AIG's announcement after the markets closed on Wednesday that it took $11.7 billion (£6.06 billion) of writedowns in the second quarter on mortgage bond insurance contracts and investments in homeloan-backed securities. These pushed the group into a $5.4 billion loss for the period.

Robert Willumstad, AIG's chief executive, said: "It's very hard to predict right now when and if we'll need more capital. Future losses can change that assumption and we're obviously dependent on the condition of the US housing market."

The insurer's shares closed down $5.31, or 18.25 per cent, to $23.78 in afternoon trading. Before yesterday, AIG's shares had already lost more than half of their value this year on mounting credit-crunch related writedowns and fears of continuing losses in the foreseeable future.

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