A federal appeals court ruled in favor of American International Group Inc in concluding that the insurer's $10 billion lawsuit against Bank of America Corp over mortgage losses belongs in state court, not federal court.

The 2nd U.S. Circuit Court of Appeals on Friday threw out a lower court order denying AIG's bid to move the case to a New York state court. AIG's lawsuit was filed in August 2011 but has been largely on hold because of the venue fight.

AIG accuses Bank of America and its Countrywide and Merrill Lynch units of making fraudulent misrepresentations in connection with $28 billion of residential mortgage-backed securities AIG bought, causing large losses for the insurer.

(Reporting by Jonathan Stempel in New York; editing by John Wallace)