Shares of Ambac Financial Group Inc. plunged 42 percent in heavy volume Friday, a day after Moody's said it might downgrade the bond insurer's ratings.

After markets closed on Friday, Ambac put out a statement saying it would suspend its $50 million stock buyback plan and postpone an $850 million contribution to Connie Lee, its new financial-guarantee subsidiary. Ambac also said any potential downgrade would pressure its business in the near term.

Late Thursday Moody's said it placed the company's "Aa3" insurance financial strength rating under review for possible downgrade. Downgrades make it more expensive for bond insurers like Ambac to borrow money and operate.

The notice sent down Ambac's stock $2.80, or 42 percent to $3.87 on Friday in double the average daily trading volume, despite a broader rally in the market on news of a sweeping government rescue plan for U.S. financial institutions. Ambac repeated it was "surprised" by Moody's decision and "mystified" by the ratings agency's methodology.

"Moody's updated mortgage loss assumptions are extreme in our view and appear to be based on limited additional data since their last review," Ambac said in a statement. It said that the whatever assumptions were used are "not valid" Friday due to the government plan.

Lehman Brothers' bankruptcy is expected to result in the early terminations of about $1.2 billion in GIC, or Guaranteed Investment Contract, liabilities. It expects to fund the termination with a mix of GIC investment portfolio resources and affiliate transactions with Ambac Assurance Corp.

Ambac also added it was in talks with the Commissioner of Insurance of the State of Wisconsin to review alternatives should a ratings downgrade cause a potential collateral shortfall in its GIC business.

Upon a downgrade, Ambac's GIC asset portfolio would be insufficient to cover the company's projected cumulative collateral requirement and terminations.

A downgrade to "A+" would require an estimated $1 billion collateral posting, while a downgrade to "A'' would nearly double that shortfall, to $1.9 billion.

The New York-based company said it still believes it can "withstand the stress imposed by the current credit environment on our portfolio."

The statement was released after the close of the markets. In after-hours trading, Ambac shares slid another $1.04, or 27 percent, to $2.83.