NEW YORK (Reuters)—A federal judge on Monday refused to dismiss a class-action lawsuit accusing American International Group Inc. of misleading investors about its exposure to subprime mortgages, which led to a liquidity crisis and $182.3 billion of federal bailouts.

Monday's ruling by U.S. District Judge Laura Taylor Swain allows the case to go forward and could pave the way for a trial. The government rescue led taxpayers to take a nearly 80% stake in the New York-based insurer.

Investors led by the State of Michigan Retirement Systems, which oversees several state pension plans, accused AIG, executives and directors of failing to disclose the risks that AIG had taken on through its portfolio of credit default swaps and a securities lending program.

They said the failures led investors to buy stock and debt they otherwise would not have bought, resulting in billions of dollars in losses.

Judge Swain wrote that the allegations in the consolidated class-action lawsuit were sufficient to suggest "a strong inference of fraudulent intent" in how AIG communicated publicly about the risks of its credit default swaps.

She also said that plaintiffs made sufficient arguments to claim that AIG "materially misled the market" in hiding its "expansive" credit default swap underwriting, repeatedly expressing confidence in its ability to manage risk and justifying a May 2008 capital raising.

Among the defendants are Martin Sullivan, a former AIG chief executive; Joseph Cassano, who ran AIG's Financial Products unit, which managed the credit default swap portfolio; current and former directors; 34 banks that underwrote AIG securities, and former accountant PricewaterhouseCoopers L.L.P.

The lawsuit covers investors who bought AIG securities between March 16, 2006, and Sept. 16, 2008, when AIG received its first bailout.

Earlier this year, the U.S. Justice Department and Securities and Exchange Commission closed probes arising from AIG's use of the credit default swaps.

AIG spokesman Mark Herr in an e-mail said that when all facts are revealed, "it will be clear that no fraud occurred and shareholders were not misled as to any of the risks."

E. Powell Miller, a lawyer for the lead plaintiff, declined to make an immediate comment, saying he had yet to confer with his client.

Brad Karp, a lawyer for the banks, declined to make an immediate comment. James Gamble, a lawyer for the outside directors, declined to comment. Lawyers for Mr. Sullivan, Mr. Cassano and PwC did not immediately return calls seeking a comment.

The case is In re: American International Group Inc. 2008 Securities Litigation, U.S. District Court, Southern District of New York, No. 08-05072.