The US Justice Department is finalising a lawsuit against Citigroup over the bank's sale of residential mortgage-backed securities after negotiations to resolve the matter broke down.

Two people with direct knowledge of the matter said that negotiations between the Justice Department and the bank over a multi-billion-dollar settlement fell apart earlier this week. They said a lawsuit from the federal government could be filed as early as next week.

Citigroup offered to pay less than $4 billion to settle the investigation, a sum substantially less than what the Justice Department is demanding.

The government has also pursued the country's other biggest banks for their conduct in sales of mortgage-backed securities in the years preceding the 2008 financial crisis.

The major banks sold securities that plunged in value when the housing market collapsed in 2006 and 2007. Those losses triggered a financial crisis that pushed the economy into the worst recession since the 1930s.

JPMorgan Chase & Company, the biggest US bank, last year agreed to pay $13 billion in a similar investigation into toxic mortgage-backed securities. The deal, the largest settlement between the US government and a corporation, was reached after months of negotiations and could serve as a template for settlements.

As part of the deal, which included settlements with New York, California and other states, JPMorgan agreed to provide $4 billion in relief to homeowners affected by the bad loans. The bank also acknowledged that it misrepresented the quality of its securities.

The Justice Department also sued Bank of America last August, accusing it of civil fraud in failing to disclose risks and misleading investors in its sale of $850 million of mortgage-linked securities during 2008.-Reuters