Mumbai: New York insurance regulators are putting together a rescue plan for Ambac Financial Group Inc., to prevent downgrades of the bond insurer that may embroil credit markets, sources close to the development said.

Reports said eight large banks, including Citigroup Inc. and UBS AG, have joined together to find ways to shore up Ambac Financial Group Inc, the second largest bond insurer, battered by the global credit crunch.

The banks discussing a possible bailout of Ambac also include Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG, sources said.

The proposed rescue plans include banks and securities firms acting as reinsurers of bonds and securities that Ambac guarantees, sources said. Ambac would pay an upfront fee against a promise by banks to reimburse it if insurance-related losses exceeded an agreed limit.

Another proposal is for banks to provide the bond insurer with capital to help it pay claims.

Separate groups are also working on similar plans to provide capital to two other bond insurers - MBIA Inc., the largest bond insurer, and Financial Guaranty Insurance Co. - sources said.

MBIA on Thursday reported a record $2.3 billion quarterly loss and said it would look for new capital. But it said it expected to retain its triple-A rating. S&P nevertheless put that rating on review for downgrade, joining Moody's.

MBIA this week received $500 million from private-equity firm Warburg Pincus LLC., which has also agreed to backstop another equity raising of at least $500 million. The insurer also sold $1 billion of surplus notes.

``While we cannot discuss specifics, there are a number of developments relating to the bond insurers,'' New York insurance superintendent Eric Dinallo in a statement.

Fitch Ratings last month stripped Ambac of its `AAA' rating, which had guaranteed about $556 billion of municipal and structured finance debt. Standard & Poor's and Moody's Investors Service Inc. are also reviewing their top ratings on the New York- based company.

MBIA CEO Gary Dunton said the insurer has more than enough capital to keep its `AAA' grade and dismissed speculation the Armonk, New York-based company may go bankrupt.

Financial Guaranty, a unit of New York-based FGIC Corp., lost its `AAA' credit rating at Fitch Ratings January 30 after missing a deadline to raise capital.

The US doesn't have a federal agency that regulates the insurance industry and instead leaves the task to the states. Dinallo is working on the plan for the bond insurers in consultation with New York Governor Eliot Spitzer and officials from the New York Federal Reserve Bank.

The stakes are high for banks, insurers and the broader economy. Bond insurers, which guarantee more than $2.4 trillion of debt, are expected to suffer billions of dollars of losses after insuring repackaged subprime mortgages. They are looking to raise capital to protect their credit ratings.

Any downgrades of insurers could force investors to sell billions of dollars of bonds, lifting borrowing costs for consumers, governments and others, and resulting in big losses at major banks.

Ambac guarantees about $524 billion of bonds, while rival bond insurer MBIA Inc guarantees $679 billion.

Insurers need to raise capital to keep their ratings, but raising capital is difficult now. Ambac last month cancelled plans to issue equity or convertibles in part because of market conditions.

Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. Ambac's principal operating subsidiary, Ambac Assurance Corporation, is a leading guarantor of public finance and structured finance obligations.