Rushing to rescue Citigroup, the U.S. government agreed to shoulder hundreds of billions of dollars in possible losses at the stricken bank and to plow a fresh $20 billion into the financial services company.

Regulators hope the dramatic action will bolster badly shaken confidence in the once-mighty banking giant as well as the nation’s financial system, a goal that so far has been elusive despite a flurry of government interventions to battle the worst global crisis since the 1930s.

Wall Street appeared encouraged as stock futures moved higher ahead of the market opening in New York. Dow Jones industrial average futures rose almost two per cent. Stock markets in Britain and Germany gained more than four per cent in afternoon trading. Citigroup shares themselves climbed 44 per cent to $5.64 in pre-market trading.

The action, announced on Sunday by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already fragile financial system and the U.S. economy.

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said in a joint statement. “We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks.”

The bold move is the latest in a string of high-profile government bailout efforts. The Fed in March provided financial backing to JPMorgan Chase’s buyout of ailing Bear Stearns. Six months later, the government was forced to take over mortgage giants Fannie Mae and Freddie Mac and throw a financial lifeline — which was recently rejiggered — to insurer American International Group.

Critics worry the actions could put billions of taxpayers’ dollars in jeopardy and encourage financial companies to take excessive risk on the belief that the government will bail them out of their messes.

The Citigroup rescue came after a weekend of marathon discussions led by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Timothy Geithner, President of the Federal Reserve Bank of New York, who is being tapped by President-elect Barack Obama as his Treasury chief, also participated.

Vikram S. Pandit, Citi’s Chief Executive Officer, welcomed the action. “We appreciate the tremendous effort by the government to assure market stability,” he said in a statement issued on Monday.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government also received an ownership stake.

As part of the plan, Treasury and the FDIC will guarantee against the “possibility of unusually large losses” on up to $306 billion of risky loans and securities backed by commercial and residential mortgages. Under the loss-sharing arrangement, Citigroup will assume the first $29 billion in losses on the risky pool of assets. Beyond that amount, the government would absorb 90 per cent of the remaining losses, and Citigroup 10 per cent. Money from the $700 billion bailout and funds from the FDIC would cover the government’s portion of potential losses. The Federal Reserve would finance the remaining assets with a loan to Citigroup.

In exchange for the guarantees, the government will get $7 billion in preferred shares of Citigroup. In addition, Citi said it will issue warrants to the U.S. Treasury and the FDIC for about254 million shares of the bank’s common stock at a strike price of $10.61. As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than one cent a share for three years unless the financial services company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.

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