By ANDREW DOWELL
March 5, 2008 1:53 p.m.

NEW YORK -- Ambac Financial Group Inc., the battered No. 2 U.S. bond insurer, said Wednesday it will try to raise $1.5 billion in fresh capital to defend the key AAA rating at subsidiary Ambac Assurance.

Ambac will try to sell $1 billion in common stock and $500 million worth of equity units -- notes that must be converted to common stock in May 2011.

The common stock offering will dilute the holdings of existing shareholders. Ambac's shares dropped 10% on the news to $9.65.

Ambac warned the offerings may not be enough to prevent a later downgrade of Ambac Assurance's AAA ratings by Moody's Investors Service or Standard & Poor's. Were that to happen, the company said in a prospectus filed with the Securities and Exchange Commission that it could retreat to "a significantly reduced business plan" and operate with AA ratings...