The mutual funds industry is worth $7 trillion

Alliance had been accused of allowing big investors to execute rapid-fire trades in its shares, a practice that erodes returns for ordinary savers.

Some of the payout will be used to compensate investors who lost out.

Alliance is the latest casualty in a crackdown on mutual funds, which handle the savings of millions of Americans.

"Alliance Capital violated the first rule for investment advisers - to protect the interests of the client," said Stephen Cutler of the Securities and Exchange Commission (SEC), the US financial markets watchdog.

"A violation of this fundamental trust warrants a most severe sanction."

Fees cut

Under the settlement deal with the SEC, Alliance has also agreed to appoint more independent directors in an effort to raise standards of corporate governance.

Under a separate deal with New York Attorney General Eliot Spitzer - who is conducting a separate probe into the mutual funds industry - the firm will also cut the fees it charges investors by 20% from 1 January.

Alliance, majority-owned by French insurance group Axa, is the latest of several mutual funds to strike a deal with investigators.

Last month, Wall Street giant Morgan Stanley paid $50m to settle a probe into its mutual fund arm.

Separately, Putnam Investments - the fifth biggest mutual fund in the US - struck a deal with regulators under which it has agreed to make good any losses suffered by its customers.

Across the mutual fund industry as a whole, dozens of senior managers have been suspended or have lost their jobs.

Insider advantage

The investigation came in response to revelations of widespread abuses in the industry, which look after the long-term savings of about half of all American households.

Many of the funds under investigation - including Alliance - are suspected of so-called market-timing, where investors exploit outdated prices by rapidly trading in and out of fund shares.

Market-timing is not illegal, but is frowned on in the industry.

Some are also accused of late-trading - an illegal practice where fund managers allow big investors to execute overnight trades in fund shares at the previous day's price.