(Reuters) – Former American International Group Inc ChiefExecutive Maurice “Hank” Greenberg may pursue a $25 billion lawsuitaccusing the U.S. government of engineering an unconstitutionalbailout of the insurer, a federal judge ruled.

Judge Thomas Wheeler of the U.S. Court of Federal Claims allowedmost of the case brought on behalf of Greenberg's company StarrInternational Co, which once held a 12 percent AIG stake, toproceed, while dismissing some claims.

Starr sued the government last November, saying its taking of a79.9 percent AIG stake and extending an $85 billion credit linewith an onerous initial 14.5 percent interest rate deprivedshareholders of their due process and equal protection rights.

Once the world's largest insurer by market value, AIG receivedthe bailout on Sept. 16, 2008 at the height of the global financialcrisis, as losses were skyrocketing from risky bets on mortgagedebt through credit default swaps.

Starr claimed the government improperly seized control as ameans to provide a “backdoor bailout” to Goldman Sachs Group Incand other trading partners. Some partners were ultimately paid 100cents on the dollar.

In a 49-page, single-spaced decision on Monday, Wheeler said“whether AIG or the government caused or contributed to the direfinancial situation of AIG,” and whether AIG was the ultimateintended beneficiary of the bailout, remain open issues.

“Given the existing factual disputes on these issues, the courtdenies the government's request to dismiss Starr's takings claim onthe basis that the loan agreement was a rescue of AIG from theconsequences of its own business risks,” he wrote.

FAILURE OF OWN MAKING?

Wheeler added that Starr had “alleged sufficiently that thegovernment coerced AIG's board” into accepting a bailout.

The government had countered that AIG had “asked and agreed tobe rescued by the Federal Reserve Bank of New York, electing tosave itself from a failure of its own making.”

The Court of Federal Claims sits in Washington, D.C., andhandles lawsuits seeking money from the government. Starr suedthere on behalf of itself and other AIG shareholders.

Charles Miller, a spokesman for the U.S. Department of Justice,declined to comment. A lawyer for Greenberg declined immediatecomment. AIG declined to comment.

NEW YORK LAWSUIT

The estimated damages reflected what Starr called the value ofthe government's stake on Jan. 14, 2011, when it swapped AIGpreferred stock for 562.9 million common shares in exchange for$500,000 — “virtually nothing,” according to the complaint.

Starr is pursuing a separate lawsuit over the bailout againstthe New York Fed, whose president in 2008 was Timothy Geithner, nowthe U.S. Treasury Secretary.

The New York Fed on Monday filed court papers to dismiss thatlawsuit, saying the bailout “avoided potentially catastrophicconsequences to the national and global economies.”

Greenberg, 87, had led AIG for nearly four decades prior to his2005 ouster amid questions by regulators over the insurer'saccounting.

His lawyers include David Boies, who represented Vice PresidentAl Gore in the disputed 2000 presidential election.

AIG's bailout eventually totaled $182.3 billion. Thegovernment's stake has fallen to 61 percent.

The cases are Starr International Co v. U.S., U.S. Court ofFederal Claims, No. 11-00779; and Starr International Co v. FederalReserve Bank of New York, U.S. District Court, Southern District ofNew York, No. 11-08422.