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The Treasury sold 200 million shares of AIG at $29 per share, a slight discount from their closing price and not far above the $28.73 average price the Treasury will need to recoup its full investment in the company.

The $8.7 billion total sale, which included 100 million shares sold by AIG itself, was also far smaller than the $10 billion to $20 billion banking sources had been throwing around, and hinted at a persistent lack of investor interest in the firm despite its apparent strides.

Treasury acquired the shares under extreme duress, as the potential failure of the insurance giant threatened to exacerbate an already severe financial crisis in late 2008.

Tuesday's sale represented the first step in removing generous support for the insurance behemoth, which totaled over $180 billion in several installments.

Treasury will remain by far the majority shareholder of AIG, but its holdings now comprise 77 percent of the total, down from 92 percent before the sale.

"We're hopeful that we can recover all the investment that we made," Tim Massad, the Treasury's acting secretary for financial stability said during a conference call with reporters.

But he added that the extent of losses -- or profits -- would not be known until Treasury fully exits its stake.

Massad said there is no specific timetable for the sale of remaining shares. He added that, following an agreed "lock-up" period of 120 days, the Treasury would continue to reduce its holdings "in an orderly fashion."

"We're going to sell in a way to maximize value to the taxpayer," Massad said.

Treasury raised $5.8 billion on Tuesday. All told, it needs to raise $47.5 billion to break even on the equity portion of its investment in AIG.

WHO COULD FORGET?

AIG's share sale is important for the U.S. government, which is trying to sell out of multiple investments it made in companies during the financial crisis.

The bailouts were highly unpopular, especially after it became known that top managers in the very same AIG unit that drove the company into a rut had continued to pay themselves handsome bonuses even while receiving taxpayers' help.

The AIG share sale is also a key moment for Chief Executive Officer Robert Benmosche. Benmosche, who became AIG's fifth CEO in less than five years in August 2009, halted a plan to break the company up in a fire sale of its parts.

He instead embarked on a revival centered around two core businesses: U.S. life insurer SunAmerica and global property insurer Chartis. Other businesses were sold, taken public or left to operate with a view toward an eventual sale.

AIG was literally minutes from bankruptcy when it was rescued in September 2008. The various iterations of the rescue package ended up being worth $182 billion, dwarfing various other bailouts around the world during the financial crisis.

The question now is how quickly the U.S. government exits its investment and whether it breaks even.

Benmosche has said he expects the government to be out of its AIG position by mid-2012. Fitch Ratings said recently its own models for the company assume the government is out by the end of 2012.

(Additional reporting by Ben Berkowitz; Editing by Gary Hill)

The 300 million share offering, which includes shares sold by Treasury as well as AIG, priced at $29 and raised $8.7 billion, a source familiar with the situation said on Tuesday.

For Treasury to break even on its investment, it needs to sell its 1.7 billion shares for an average price of $28.72.

The offering, in which Treasury is selling 15 percent of its AIG stake, is important for the U.S. government as it tries to sell off investments it made in multiple companies during the financial crisis.

The AIG share sale is also a key moment for Chief Executive Officer Robert Benmosche. Benmosche, who became AIG's fifth CEO in less than five years in August 2009, halted a plan to break the company up in a fire sale of its parts.

He instead embarked on a revival centered around two core businesses: U.S. life insurer SunAmerica and global property insurer Chartis. Other businesses were sold, taken public or left to operate with a view toward an eventual sale.

AIG was literally minutes from bankruptcy when it was rescued in September 2008. The various iterations of the rescue package ended up being worth $182 billion, dwarfing various other bailouts around the world during the financial crisis.

The question now is how quickly the U.S. government exits its investment and whether it breaks even.

Benmosche has said he expects the government to be out of its AIG position by mid-2012. Fitch Ratings said recently its own models for the company assume the government is out by the end of 2012.

Either way, the terms of the recapitalization deal that closed earlier this year include penalties if the government's investment is not closed out by 2013. Those penalties include the potential for forced asset sales.

The Treasury sold 200 million shares in the offering on Tuesday, with AIG selling an additional 100 million shares.

(Reporting by Clare Baldwin and Ben Berkowitz; Editing by Carol Bishopric, Gary Hill and Tim Dobbyn)

The Government Accountability Office said that as of September 30, 2010, the total bill for unpaid taxes, including interest and penalties, was $330 billion.

By law the federal government can make grants to entities that owe taxes, so some of the outstanding bills were racked up before the stimulus plan was passed.

"We've known for some time that there's a significant tax gap in this country, and in some cases we've found that government contractors are contributing to the problem," said Senator Tom Carper, a Democrat from Delaware, in a statement.

He added that "those who fail to pay their fair share... force their fellow Americans who play by the rules to pay more in taxes."

Last month, the office reported that as of September 30, 2009, 3,700 contract and grant recipients owed $750 million in unpaid taxes. That represented nearly 5 percent of the 80,000 funding recipients.

The $819 billion stimulus plan, a combination of spending and tax measures intended to jolt the U.S. economy out of the longest and deepest downturn since World War Two, appropriated $275 billion for grants, contracts and loans. As of March 25, about $191 billion had been paid out, the GAO said.

Because of the way the Internal Revenue Service tracks taxes owed and paid, the estimate of unpaid taxes is likely too low, it said.

The GAO said it had uncovered 15 cases in which recipients had not sent withheld payroll taxes to the Internal Revenue Service, a violation that totaled $40 million.

In one example, a nonprofit organization did not give the IRS payroll taxes from the middle to late 2000s and defaulted on agreements to pay the money in installments. Finally, the IRS filed tax liens against the organization to collect the more than $2 million it owed.

The group received awards from the stimulus plan of more than $1 million for social services, the GAO said.

Of the plan's many moving parts, which included fund transfers to states and aid for the unemployed, contracts and grants were targeted mostly at direct job creation.

According to the federal government's web site, www.recovery.gov, from January through March, recipients reported that they had created 571,383 jobs through contracts, grants and loans. The website showed almost $265 billion had been awarded.

(Reporting by Lisa Lambert; Editing by Dan Grebler)

The Commerce Department said sales increased 7.3 percent to a seasonally adjusted 323,000 unit annual rate, the highest level since December, from a slightly upwardly revised 301,000-unit pace in March.

Economists polled by Reuters had forecast new home sales unchanged at a previously reported 300,000-unit rate. All four regions recorded gains in sales, with the West reporting a 15.1 percent rise.

However, compared to April last year sales were down 23.1 percent.

"It suggests maybe we're beginning to see some signs of stabilization in housing, but it's too early to say we've bottomed out," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis, Missouri

While the report cast a positive light on the housing market, it did little to change perceptions the economy remained mired in a soft patch.

Data ranging so far ranging from retail sales to industrial production have painted a picture of an economy struggling to regain momentum as the second quarter started, with employment only the bright spot.

Manufacturing activity in the central Atlantic region paused in May, after expanding during the previous seven months, according to the Richmond Fed's latest survey, released on Tuesday.

The government is expected to report on Thursday that the economy grew at an annual 2.1 percent rate in the first quarter, according to a Reuters survey, rather than the 1.8 percent pace it estimated last month.

LOTS OF HOMES FOR SALE

"There's still a tremendous overhang in the housing market, and while new home sales are starting to percolate, that doesn't change the fact that we still have such huge inventory," said Michael Yoshikami, chief investment strategist at Ycmnet Advisors in Walnut Creek, California.

An oversupply of used houses and a relentless wave of foreclosed properties are curbing the market for new homes, even as builders are keeping lean inventories.

There were a record low 175,000 new homes available for sale last month, down 2.8 percent from the prior month. Data last week showed a steep drop in new home construction in April and a dip in sales of previously owned homes.

The Commerce Department report the median sales price for a new home rose 1.6 percent last month to $217,900. Compared with April last year, the median price increased 4.6 percent.

At April's sales pace, the supply of new homes on the market dropped to 6.5 months' worth, the lowest since April last year, from 7.2 months' worth in March.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

Moody's became the latest ratings agency on Tuesday to warn of a chain reaction of severe consequences for the 17-nation euro area if Greece were allowed to default next month, when it faces a 13.4 billion euro ($18.85 billion) funding crunch.

Greece kick-started a stalled privatization program on Monday and promised tougher austerity measures and tax hikes to meet EU/IMF conditions for the release of a 12 billion euro loan tranche in June, vital to keep Athens afloat.

But the leader of the conservative opposition, Antonis Samaras, rejected the new package of fiscal measures, rebuffing a key condition for extra European Union financial assistance -- a broad political consensus behind reforms.

The euro fell briefly and safe haven German bond futures rose when Samaras said after a meeting with Socialist Prime Minister George Papandreou: "I am not going to agree to this recipe which has been proven wrong."

Moody's chief credit officer for EMEA, Alastair Wilson, spelled out the potential wider impact of a Greek default in an interview with Reuters.

"A Greek default would be highly destabilizing and would have implications for the creditworthiness of issuers across Europe," he said.

Other stressed euro zone sovereigns could be downgraded from investment grade to junk as a result, he said, widening the gap with the currency bloc's strongest borrowers. Portugal and Ireland would be first in the firing line.

Crucially, the ECB and ratings agencies have told politicians that options they are exploring to lengthen the maturities on privately held Greek debt would be interpreted as a default-like "credit event," triggering further downgrades and disqualifying Greek bonds as collateral.

A Greek default could take many forms, including changes in the terms and conditions or a selective reprofiling, Moody's said, adding it would consider all of these as distressed debt exchanges.

Finance Minister George Papaconstantinou raised the stakes on Monday evening, saying the International Monetary Fund would not release its share of the June aid payment unless the EU undertakes to cover Athens' 2012 funding needs.

"The IMF has made absolutely clear that it cannot disburse if it does not have any guarantee that next year, if necessary, Greece will have (funding) support from the Europeans," the minister told Skai TV.

Asked what would happen if Greece did not get the next bailout tranche, he said: "The country will halt payments ... wages, pensions -- all the state's expenses will not be paid."

There was no immediate IMF comment on such a linkage.

ECB PRESSES CAMPAIGN

Against this background, the cost of insuring Greek debt against default continued to rise as investors increased bets on a "credit event." It now costs 1.435 million euros to protect 10 million euros of exposure to Greek bonds.

Greece's public debt stood at 327 billion euros, nearly 150 percent of gross domestic product, at the end of 2010 and is projected to reach more than 160 percent in 2013 -- a level which market analysts view as utterly unsustainable.

The ECB stepped up its campaign against any restructuring, which has become more shrill since the chairman of euro zone finance ministers, Jean-Claude Juncker, said last week the EU was exploring some form of "soft restructuring."

"A restructuring is a horror scenario," ECB governing council member Christian Noyer told reporters in Paris. "Greece must apply its (EU/IMF) program entirely and completely ... there is no alternative."

ECB policymakers have warned that Greek debt would no longer be accepted as collateral in central bank refinancing operations, driving Greek banks and insurers to the wall and causing huge liabilities for European lenders to Greek firms.

Ratings agency Standard & Poor's said this month it would define as a default anything that would have a negative impact on the net present value of a bond. Fitch Ratings has said: "An extension of the maturity of existing bonds would be considered by Fitch to be a default event, and Greece and its obligations would be rated accordingly."

Despite such statements, EU policymakers have continued to talk of the possibility of some form of voluntary "reprofiling" of Greek debt as a viable policy option that would not incur the definition of a "credit event."

The Dutch newspaper Het Financieele Dagblad reported on Tuesday that euro zone states had secretly started preparing for an extension of the maturity of Greek debt and creating an independent trustee to sell Greek state assets.

Dutch Finance Minister Jan Kees de Jager was quoted in the article as saying that reprofiling Greece's debt is a "serious option" but only as a possible final piece in a "total package."

The paper said the plan would entail a voluntary extension of debt maturities by a maximum of three years.

EU leaders declared they had adopted a comprehensive package to resolve the euro zone debt crisis in March, but that has not prevented contagion spreading, with Portugal requiring a bailout and markets piling pressure on Greece, Spain, Italy and Belgium.

Contagion spread in bond markets on Monday after S&P lowered Italy's outlook to negative over concerns about its deficit and Fitch threatened Belgium with a rating cut, saying the lack of a government was undermining its budget consolidation efforts.

(Additional reporting by Andrew Torchia and Marius Zaharia in London, Aaron Gray-Block in Amsterdam, Jan Strupczewski in Brussels; writing by Paul Taylor; editing by Mike Peacock)