The Worldcom affair cast a cloud over Citigroup

The bank is facing legal action from Worldcom shareholders who lost out two years ago when the firm went bust after admitting it had inflated its profits.

Citigroup lent money to Worldcom, and analysts at its Smith Barney subsidiary had hotly tipped Worldcom shares.

The settlement deal stresses that Citigroup did not break any laws.

Citigroup, the world's biggest bank, added that it planned to increase the amount it has set aside to cover possible future legal penalties and settlements.

The extra litigation reserves, plus the Worldcom settlement, would reduce its after tax profits for the April to June period by $4.9bn, it said.

Moving on

"It is important that we put this unfortunate chapter behind us," Citigroup chief executive Charles Prince said.

News of the payment pushed Citigroup shares 2.3% lower in pre-open trade on Wall Street.

The $2.6bn Worldcom payment will be shared among investors who bought the telecoms firm's shares and bonds between April 1999 and June 2002.

The collapse of Worldcom, hot on the heels of the Enron scandal, shook investor confidence in the finances of corporate America, and triggered a stock market slump.

Worldcom filed for emergency protection from its creditors two years ago and embarked on a lengthy restructuring exercise.