* AIG was the posterchild for the 'too big to fail' concept
* Decision reflects new tone under Trump administration
* Follows billions of dollars of asset-shedding by AIG
* Fed's Janet Yellen only Obama-era appointee to vote in favor (Adds comment from Prudential Financial)
By Pete Schroeder and Michelle Price
WASHINGTON, Sept 29 (Reuters) - A panel of U.S. financial regulators voted on Friday to release American International Group from stricter government oversight, marking the insurance giant's rehabilitation since a massive bailout during the 2007-2009 global financial crisis.
The U.S. Financial Stability Oversight Council (FSOC) determined that AIG - which received a $182 billion U.S. government bailout - is no longer critical to the health of the global financial system after shedding billions of dollars in assets.
The decision reflects the changing tone towards financial regulation under Republican President Donald Trump, who in April ordered a review of how FSOC determines which companies are systemically risky as part his broader pledge to ease post-crisis rules.
"The Council has worked diligently to thoroughly reevaluate whether AIG poses a risk to financial stability," said Treasury Secretary Steven Mnuchin.
"This action demonstrates our commitment to act decisively to remove any designation if a company does not pose a threat to financial stability."
The move frees AIG from stricter federal oversight, including tougher capital rules. The company's shares rose 1 percent in after-hours trading.
AIG's huge pile of credit derivatives helped spark the global financial crisis, and the company quickly became a focus of public outrage when employee bonuses were paid after the government bailout in September 2008.
The labeling of major financial institutions as systemically important had its roots in AIG's rescue, which came just before the company would have been forced to file for bankruptcy protection amid mounting losses on its derivatives book.
Worried the insurance giant was "too big to fail," the government stepped in to prevent further chaos to the financial system. The company ultimately repaid taxpayers in full by the end of 2012, with a profit of $22.7 billion, according to AIG.
Since the crisis, AIG, which remains the largest commercial insurer in the United States and Canada, has sold dozens of businesses, including two Asian life insurance operations and one of the world’s biggest aircraft leasing businesses. It recently sold a mortgage-insurance unit.
"The Council's decision reflects the substantial and successful de-risking that AIG's employees have achieved since 2008," AIG President and CEO Brian Duperreault said in a statement.
"The company is committed to continued vigilant risk management and to working closely with our numerous regulators to enable a strong AIG to continue to serve our clients."
The FSOC, which comprises the heads of financial regulators across the government, requires a two-thirds majority to agree to remove a company's designation as a "systemically important financial institution" or SIFI.
With four appointees of President Barack Obama still holding FSOC seats, the regulatory panel did not move to remove the label when it last met.
On Friday, however, the panel managed to secure the vote of one of these Obama appointees - Federal Reserve chair Janet Yellen, according to the Treasury statement.
The remaining three Obama appointees voted against while four Trump appointees voted in favor.
By law, all banks with over $50 billion in assets are automatically considered SIFIs, while the FSOC can apply the label to nonbanks on a case-by-case basis. The panel only once before has removed a SIFI designation with GE Capital in 2016.
Th FSOC's decision on Friday left Prudential as the only remaining nonbank "systemically important financial institution".
In a statement late on Friday, Prudential said it was encouraged by FSOC's move and would consider its options while contesting its designation through the review process.
"Prudential has long maintained that we do not meet the standard for designation," it said. "With today’s action, now only one company is subjected to duplicative oversight—creating an unbalanced playing field and illustrating the arbitrary nature of individual designations."
A third insurance company, Metlife, had also received the SIFI label, but mounted a legal challenge against the decision. A federal court ruled in the company's favor. That decision was appealed by the government under President Barack Obama and remains pending in an appeals court.
FSOC's move to strip AIG of the label was criticized by public advocacy groups that said it would allow the company to return to its risky pre-crisis behavior.
"It is an historic mistake and a slap in the face to the tens of millions of Americans who suffered and continue to suffer from the devastating 2008 financial crash," Dennis Kelleher, president and CEO of Better Markets, said in a statement. (Reporting by Michelle Price; Editing by Cynthia Osterman & Simon Cameron-Moore)