Citigroup Inc. and the U.S. government were near an agreement Sunday night to rescue the beleaguered financial giant by creating a "bad bank" to remove billions of dollars in potentially toxic assets from Citi's balance sheet, according to media reports.

Under such an agreement, taxpayers could be on the hook if Citigroup's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour, The Wall Street Journal reported in its online edition. Citi has been hammered by mortgage-related losses.

The reports of discussions with the Treasury Department and Federal Reserve came as other reports had Citi's board of directors meeting to consider a wide range of alternatives for the battered financial giant, including selling parts or all of the company and replacing key executives. 

Neither bank nor government officials were available for comment, according to the reports. A White House spokeswoman said President Bush wasn't aware of any bailout discussions involving Citi, according to one report.

An agreement would mark a new phase in government efforts to stabilize U.S. banks and securities firms, the Journal reported.

After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to absorb bad assets, on a targeted basis, from specific institutions, according to the Journal's report.

The Journal said the Sunday talks centered on the creation of what is sometimes called a "bad bank," an outside entity designed to hold some of a financial firm's worst assets, in Citi's case, up to $50 billion in such assets.

Under the terms being discussed with top Treasury Department and Federal Reserve officials, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold, the Journal reported, citing unnamed people familiar with the matter.

The U.S. government would then absorb any additional losses, the Journal said.

It was unclear if the government would take an equity stake in Citigroup in return for the support and if Citigroup would get a government loan to finance the facility, the Journal said. The government took that approach with AIG in September.

It wasn't clear if Citigroup will be required to make changes ion its executive ranks, board f directors or elsewhere inside the company in return for the assistance, the Journal reported.

Behind the push is a broad effort to shore up faith in Citigroup, which saw its stock price fall 60% in the past week to a 16-year low. The stock closed Friday at $3..77 a share and rose slightly in after-hours trading to $4.01. Citigroup has been pounded by mortgage-related losses.

In addition to $2 trillion in assets it has on its balance sheet, Citi has another $1.23 trillion in entities that aren't reflected there, according to reports. Some of those assets are tied to mortgages, and investors have worried they could cause heavy losses if they are brought back on the company's books, the Journal said.

CreditSights said an acquisition of Citigroup Inc  by Goldman Sachs  or Morgan Stanley would significantly add to earnings, if Citi's bad assets were absorbed by the U.S. government.

"A potential acquisition of Citigroup would be significantly accretive to Goldman and Morgan Stanley's earnings as the potential buyer would be acquiring a significant future earnings stream for a relatively low price," said analyst David Hendler, in a research note.

"However, the potential need for mark-to-market adjustment on Citi's $2 trillion balance sheet would likely cause capital adequacy concerns for most buyers sans a government backstop," said Hendler, in the note dated Nov. 22.

Citigroup's shares fell 60 percent last week to $3.77.

Citigroup's executives last week debated options as the company's share price sank, including merging with another bank or selling off businesses.

Citigroup also spoke to the Federal Reserve and the U.S. Treasury last week about the government making a public statement of support and perhaps even putting additional funds into the bank.