The sale is the latest step to recoup taxpayer money spent on the largest bailout of the financial crisis.
AIG said Sunday that the Treasury Department is selling $18 billion worth of its common shares to institutional investors.
If there is more demand, the government will grant the underwriters a 30-day option to buy up to $2.7 billion more of its stake in the company.
AIG said it will buy back $5 billion worth. The price is not yet determined.
The move should reduce the government's stake in AIG to less than 20 percent of the insurer's total outstanding stock. Right now, Treasury holds about 53 percent of the company, or more than 871 billion shares of common stock, worth about $30 billion.
The government has reduced its stake from 92 percent of the company, after selling shares four times in the last couple of years for a total of $23.3 billion. The most recent sale of about $5 billion was in early August.
AIG, which is based in New York, nearly collapsed in 2008. It received $182 billion from the U.S. government - the biggest of the Wall Street bailout packages - after suffering massive losses from investments in derivatives.
The company has sold off several different units in order to raise money to pay off its debt to the government.
The bailout sparked public outrage and demands in Congress for an investigation, especially after it was revealed that millions in bonuses would go to employees in the AIG division most responsible for the company's need for a bailout. The bonuses were found to be contractual obligations agreed upon years earlier, before AIG received the bailout.
AIG shares closed Friday at $33.99, up about 47 percent since the start of the year.