AIG shareholders have launched a $25 billion ($25.52 billion) lawsuit against the US Government and the New York Federal Reserve over the 2008 bailout of the giant insurance company.

Former AIG CEO Hank Greenberg filed the suit in the US Court of Federal Claims, on behalf of his company Starr International and a group of AIG shareholders.

The legal action claims the Treasury Department and the Federal Reserve violated the Fifth Amendment of the US Constitution when they took an 80% stake in AIG in September 2008.

The allegations claim private property was effectively appropriated for “public use without just compensation”.

The US Government still holds a 77% stake in the company.

But US Treasury spokesman Tim Massad says the Government “saved AIG”.

“It is important to remember that the Government provided assistance to AIG – and stopped it from collapsing – in order to prevent a meltdown of the entire global financial system,’’ he said.

“Our actions were necessary, legal and constitutional. We are reviewing the lawsuit and expect to defend our actions vigorously.’’

The 86 year old Mr Greenberg ran AIG for nearly 40 years until he was forced to step down in 2005.