Fearing a financial crisis worldwide, the Federal Reserve reversed course Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.

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WASHINGTON — Fearing a financial crisis worldwide, the Federal Reserve reversed course Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.

The decision, only two weeks after the Treasury took over the federally chartered mortgage-finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.

With time running out after AIG failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue.

They emerged an hour later with Paulson and Bernanke looking grim but lawmakers generally expressing support for the emergency loan.

But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by AIG and other institutions it does business with.

What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but AIG’s role as an enormous provider of financial insurance, which effectively requires it to cover losses suffered by other institutions in case of defaults of securities that they have purchased.

It meant AIG was potentially on the hook for billions of dollars’ worth of risky securities once considered safe.

If AIG had collapsed — and been unable to pay all of its insurance claims — institutional investors worldwide would have been instantly forced to reappraise the value of those securities, which in turn would have reduced their own capital and the value of their own debt.

“It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University. “The spillover effects could have been incredible.”

Financial markets, which Monday had plunged over worries about AIG’s possible collapse, reacted with relief to the news of the bailout. In anticipation of a deal, stocks rose about 1 percent in the U.S. on Tuesday and were up about 2 percent in midday trading in some Asian markets today.

Still, the move will likely spark an intense political debate during the presidential-election campaign over who is to blame for the financial crisis.

“This is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it,” said Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee.

Democratic House Speaker Nancy Pelosi quickly criticized the rescue, calling the $85 billion a “staggering sum.” Pelosi said the bailout was “just too enormous for the American people to guarantee.”

Her comments suggested the Bush administration and the Fed would face sharp questioning in congressional hearings.

The decision was a remarkable turnabout by the Bush administration and Paulson, who had flatly refused over the weekend to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America.

Earlier this year, the government bailed out Bear Stearns by engineering a sale to JPMorgan Chase that left taxpayers on the hook for up to $29 billion of bad investments.

The government hoped at the time the unusual step would calm markets and help the financial system recover. But critics warned it would encourage others to seek bailouts and the costs to the government would be staggering.

The decision to rescue AIG came on the same day the Fed decided to leave its benchmark interest rate unchanged at 2 percent, turning aside hopes by many on Wall Street that the Fed would try to shore up confidence by cutting rates again.

Fed and Treasury officials initially had turned a cold shoulder on AIG, when its executives pleaded Sunday night for a $40 billion bridge loan to stave off a crippling downgrade of its credit ratings as a result of tens of billions of dollars of losses related to insurance investments turned sour.

But government officials reluctantly backed away from their tough-minded approach after a failed attempt to line up private financing with help from JPMorgan Chase and Goldman Sachs, which told federal officials they simply could not raise the money, given both the angst in credit markets and the specific fears over AIG.

The complexity of AIG’s business, and the fact that it does business with thousands of companies around the globe, make its survival critical at a time when there is stress throughout the financial system worldwide.

“It’s the interconnectedness and the fear of the unknown, meaning the impact of a failure,” said Roger Altman, a former Treasury official in the Clinton administration.

“But size is a factor; you can’t ignore that. The prospect of the world’s largest insurer failing, together with the interconnectedness and the uncertainty about the collateral damage — that’s why it’s scaring people so much.”

Under the plan, the Fed will make a two-year loan to AIG of up to $85 billion and, in return, will receive warrants that can be converted into common stock giving the government nearly 80 percent ownership of the insurer. All of the company’s assets are being pledged to secure the loan.

The Fed said the loan would allow AIG to sell “certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.”

AIG is a sprawling empire built by Maurice “Hank” Greenberg, who acquired hundreds of businesses all over the world until he was ousted amid an accounting scandal in 2005.

Many of its subsidiaries wrote insurance of various types.

Others made home loans or leased aircraft.

Its International Lease Finance Corp. unit is Boeing’s best customer. Steven Udvar-Hazy, the unit’s founder, may try to buy back the business from AIG, The Wall Street Journal reported Tuesday night.

AIG’s downfall involved a new kind of insurance its financial-products unit offered investors in complex debt securities.

Its stock tumbled faster this year as first the debt securities lost value because of falling home values, then the derivatives-based insurance contracts came under a cloud.

But in the last two days, credit-default swaps that AIG ‘s financial-products unit had sold began eating up billions of dollars of AIG’s cash and liquid assets.

The Fed’s extraordinary rescue of AIG underscores how much fear remains about the destructive potential of the complex financial instruments, that brought AIG to its knees.

The market for such instruments has exploded in recent years, but it is almost entirely unregulated.

When AIG began to teeter in the last few days, it became clear that if it defaulted on its commitments under the swaps, it could set off a devastating chain reaction through the financial system.

“We are witnessing a rather unique event in the history of the United States,” said Suresh Sundaresan, the Chase Manhattan Bank professor of economics and finance at Columbia University.

“They’re going to tighten the screws and say, ‘We want some safeguards on this market,’ ” he said of the Fed and the Treasury. “Contagion risk is very high.”