(Reuters) - American International Group Inc has agreed to drop litigation against the Federal Reserve Bank of New York over who has the right to sue over losses suffered by the insurer on residential mortgage-related securities.

The insurer and Maiden Lane II, a vehicle created by the Federal Reserve Bank of New York to buy troubled RMBS from the insurer, agreed to dismiss the case without prejudice, according to a May 28 court order, which was made public on Thursday.

At issue was whether AIG had assigned to Maiden Lane II its right to sue over losses on RMBS it sold to that entity.

Earlier this month, in a case involving Bank of America Corp's Countrywide unit, a federal judge in California said AIG may sue over RMBS sold to Maiden Lane II.

"In light of the recent ruling that AIG did not assign its fraud claims to ML II, we have agreed to dismiss our declaratory judgment action, without prejudice to our right to reinstitute it if necessary," AIG spokesman James Ankner said.

Jack Gutt, a New York Fed spokesman, declined to comment.

(Reporting by Jonathan Stempel in New York; Additional reporting by Ben Berkowitz in Boston and Jonathan Spicer in New York; Editing by Phil Berlowitz)

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