NEW YORK: The United States government has bailed out Citigroup, agreeing to shoulder most of the potential losses on US$306 billion (S$463 billion) of high risk assets and inject US$20 billion of new capital, in its biggest rescue of a bank yet.

Citigroup's rescue marks the latest US effort to contain a widening financial meltdown that has caused the disappearance or bankruptcies of companies including Bear Stearns and Lehman Brothers.

If it works, the package may become a template for other US banks expected to face growing losses as the economy sinks into recession. Credit losses once concentrated in mortgages are already bleeding into other areas such as credit cards and commercial real estate.

Capital at Bank of America and Wells Fargo could 'fall short of the comfort zone' in a very severe recession, analysts have said. Bank of America is buying Merrill Lynch and in July, bought troubled mortgage lender Countrywide Financial while Wells Fargo is buying Wachovia. Merrill and Wachovia have had significant losses tied to mortgages.

The government's US$20 billion of new capital comes on top of US$25 billion it had put into the second-largest US bank by assets, and it will receive preferred shares with an 8 per cent dividend in return.

Citigroup shares jumped by more than 50 per cent to $5.80 in early trading yesterday morning in response to the news.

The Treasury Department could end up absorbing US$5 billion of losses, the Federal Deposit Insurance Corp, US$10 billion, and the Federal Reserve, the rest.

The bank estimated that it will receive US$40 billion of capital benefits, partially from the government guarantee.

Citigroup received the latest infusion after its shares plunged 60 per cent last week to US$3.77, amid worry it lacked enough capital to survive.

In return for the bailout, Citigroup's dividend will essentially be wiped out. The bank cannot pay out more than 1 cent per share per quarter over the next three years without government consent. The quarterly dividend is now 16 US cents.

Citigroup has the farthest international reach of any US bank, with operations in more than 100 countries. The bank was widely perceived to be too big to be allowed to fail, because any collapse could cause financial havoc around the globe.

The bank will try to modify troubled mortgages in the US$306 billion portfolio as the government tries to keep homeowners out of foreclosure.

Chief executive Vikram Pandit and other members of top management will keep their jobs but the government will have the final say on executive pay packages.

Asian stock markets trimmed earlier losses yesterday following the Citigroup announcement, while several European stock indices rose. Citi's shares soared on the news of the rescue, jumping 42 per cent to ?4.20 at 0819 GMT in Frankfurt.

But not all investors were pleased. 'You're seeing an inept management team being rewarded by the US government,' said Mr William Smith, chief executive of Smith Asset Management in New York, which owns Citigroup stock.

The rescue further magnifies the US government's burden, following bailouts of American International Group, Bear, Fannie Mae and Freddie Mac, and the injection of hundreds of billions of dollars into banks and other financial institutions.

Well over US$1 trillion of taxpayer money is at risk, and the Big Three carmakers in Detroit are seeking billions more to avoid possible bankruptcy.

The administration of President-elect Barack Obama may also propose a US$500 billion to US$700 billion economic stimulus when he comes into office on Jan 20.

The Fed, the Treasury Department and the FDIC called the Citigroup rescue 'necessary to strengthen the financial system and protect US taxpayers and the US economy'.

Citigroup estimated the injection will give it a Tier-1 capital ratio of 14.8 per cent, more than twice what the government requires. The bank said it will also get increased access to the Fed's discount window, adding liquidity.

'In the near term, it reduces systemic risk but it does raise questions about what it means for the industry longer-term,' said Mr David Forrester, foreign exchange strategist at Barclays Capital in Singapore.