Paterson asked New York state insurance regulators to essentially allow AIG to provide a bridge loan to itself. The governor has also asked the head of New York's insurance department to talk with Federal regulators about providing an additional bridge loan to AIG.
"AIG still remains financially sound," Paterson said.
The move will allow AIG to use those assets as collateral to borrow cash to fund its day-to-day operations, Paterson explained.
AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets.
Shares of AIG - once the world's most valuable insurer by market value - fell $5.52, or 45 percent, to $6.62 in afternoon trading. They had been down as much as 63 percent to $3.50 before Paterson's comments.
According to news reports, New York-based AIG was seeking $40 billion in emergency funds - possibly from the Federal Reserve - to help the insurer avoid a credit rating downgrade, which would make it more expensive for AIG to raise money. AIG has already raised $20 billion in new capital this year.
Also, the insurer was said to be in "rescue" talks with Buffett.
Berkshire Hathaway spokeswoman Jackie Wilson said Buffett was not available Monday to comment on the AIG-rescue reports. Typically, Berkshire does not comment on any deals before they are completed.