MBIA unit's "Aaa" rating affirmed by Moody's

Moody's Investors Service on Tuesday dropped its immediate threat to cut the top "Aaa" rating of MBIA Inc's insurance unit, staving off the prospect of more bank losses and market declines.

While downgrades are still possible, especially if MBIA, the world's biggest bond insurer, splits its business lines, the latest action eased market concerns over rating downgrades of bond insurers and the debt they guarantee.

"The affirmation of triple A is a big shot in the arm for the entire industry," said Donald Light, an insurance analyst at Celent, a consulting firm in Boston. "It shows that somebody in the bond insurance industry can take a step back from the brink."

MBIA's shares rose 4.8 percent to $15.28. Shares of Ambac Financial Group Inc (ABK.N: Quote, Profile, Research), the No. 2 bond insurer, were down 1.8 percent at $12.19, a day after jumping 15.9 percent in the wake of reports it was near a deal to shore up its financial position.

If Moody's or S&P had stripped MBIA of its top ratings, bond markets could have been sent into turmoil and new bond issuance could have slowed, cutting into Moody's revenue.

The cost of protecting bond insurers' debt with credit default swaps narrowed on Tuesday on optimism some bond insurers can maintain their top ratings.