(Reuters) - The insurer AIG is suing Bank of America Corp to recover more than $10 billion of losses from a "massive fraud" on mortgage debt, deepening the morass of litigation faced by the largest U.S. bank.

American International Group Inc, still largely owned by taxpayers after $182.3 billion of government bailouts, is the latest of a growing number of investors filing lawsuits to hold banks responsible for losses on soured mortgages that contributed to the financial crisis.

The AIG complaint accuses Bank of America and its Countrywide and Merrill Lynch units of misrepresenting the quality of mortgages placed in securities and sold to investors. AIG said it suffered its losses on $28 billion of investments.

"Defendants were engaged in a massive scheme to manipulate and deceive investors, like AIG, who had no alternative but to rely on the lies and omissions made," said the complaint, being filed in the New York State Supreme Court in Manhattan.

Bank of America bought Countrywide for $2.5 billion in July 2008 and acquired Merrill six months later. The Countrywide acquisition is almost universally considered a disaster because of the costs of litigation and writing down bad loans.

"There is going to be more finger-pointing and mortgage litigation," said Michael Mullaney, who helps oversee $9.5 billion at Fiduciary Trust Co in Boston, which has sold nearly all its Bank of America stock. "Much of it is well deserved, especially related to Countrywide, which turned out to be a sinking ship."

In morning trading, Bank of America shares were down 7 percent at $7.60, while AIG shares were down 2.2 percent at $24.55. Most financial stocks were down following the Standard & Poor's downgrade of the United States' long-term debt rating.

Bank of America rejected the AIG allegations.

"AIG recklessly chased high yields and profits throughout the mortgage and structured financemarkets," spokesman Lawrence Di Rita said. "It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors. We reject its assertions and allegations."

In a statement, AIG said it expects to file more lawsuits against other banks that "sought to profit at our expense."

Separately, AIG plans to intervene in Bank of America's $8.5 billion agreement in late June to end most litigation by investors, including BlackRock Inc and Allianz SE's Pimco, that bought securities backed by risky Countrywide home loans, according to a person familiar with the matter. The source was not authorized to speak on the plans.

A growing number of investors has called the payout too low and say Bank of New York Mellon Corp as trustee did not negotiate fairly. New York Attorney General Eric Schneiderman is moving to block that accord.

The case is American International Group Inc v. Bank of America Corp et al, New York State Supreme Court, New York County.

(Reporting by Jonathan Stempel; Additional reporting by Ben Berkowitz, Sakthi Prasad and Joe Rauch; editing by John Wallace)

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