The US treasury department has announced that it is investing $20bn in Citigroup Inc as one of a series of actions to help the bank, which has lost billions of dollars amid the US economic downturn.

In a late Sunday night announcement, the treasury department also said it would guarantee against losses of about $306bn in loans and securities held by the bank.

The US government investment will give taxpayers an eight per cent stake in the  company.

Citigroup was to issue seven billion dollars in preferred stock to the US treasury and the Federal Deposit Insurance Corporation as payment for the 306 billion dollar guarantee.

For its part, Citigroup has agreed to comply with limits on employee severance agreements, executive pay and privileges, and implement a government mortgage modification program to limit home foreclosures.

Executive compensation, including bonuses, must be approved by the US government under the rescue plan.

US stocks rose more than 4.5 per cent as news of the aid plan emerged, with the Dow Jones Industrial Index leaping about 400 points to close at 8443.39 points on Monday.

Job losses

However, analysts say the move by the treasury could be risky.

The global financial crisis has also hit Citigroup hard [Reuters]

"You don't want to throw good money after bad."

"If you look at all the pledges that the US Fed has made - I'm talking about Fannie, Freddie, the whole works since the beginning of this crisis - they now total some $7.3 trillion."

Citigroup, one of the world's biggest banks, recently decided to lay off about 50,000 jobs in response to heavy losses.

The cuts came on top of a further 22,000 job losses announced by the firm in October, of which 13,000 have already gone.

The New York-based bank has posted losses for the past four financial quarters, including a heavy loss of $2.8bn during the third quarter.

In big trouble

Citigroup was once the darling of Wall Street as it was perceived to have successfully combined retail with investment banking but was now in big trouble.

It is saddled with billions of dollars in losses tied to the subprime mortgage crisis - in which millions of Americans were granted mortgages they were unable to repay - and the current global credit crunch.

Citigroup also plans to lower expenses by about 20 per cent. It has already reduced its assets by more than 20 per cent since the first quarter of the year.

It is also selling its Citi Global Services arm and its German retail banking business.

In a recent interview to the Associated Press news agency, Win Bischoff, the company's chairman, said job losses were inevitable given the current financial crisis.

"What all of us have done - and perhaps injudiciously - we've added a lot of people over ... this very benign period," he said.

"If there is a reversion to the mean ... those job losses will obviously fall particularly heavily on the financial sector."