Bank of America has agreed to buy Countrywide for about $4 billion (£2 billion) in stock as the country’s biggest mortgage lender struggles to survive after a surge in defaults on its loans.

America’s second-biggest bank, which injected $2 billion into Countrywide last August in return for a 16 per cent stake, will buy the remaining stock for about $7.16 a share.

Countrywide’s fortunes have continued to wane since Bank of America’s investment last summer, severely restricting its ability to raise new debt to maintain its operation and prompting persistent rumours - denied by the company – that it was on the brink of bankruptcy.

The group reported its first loss in 25 years in the third quarter and this week conceded that foreclosures and late payments on its mortgages hit a record high in December.

Countrywide’s woes hit its share price badly, wiping 79 per cent off its market value last year and over 30 per cent more during the first half of this week. This has left Bank of America with a paper loss of about $1.3 billion on its original $2 billion investment.

Countrywide’s shares rose by 50 per cent on Thursday as news of the group’s potential sale to Bank of America leaked into the market, erasing some of those losses. However, the shares fell almost 18 per cent yesterday after the takeover was formally announced.

Meanwhile, late last night it emerged that Citigroup could be close to raising between $8 billion and $14 billion of capital, further highlighting the extent of problems facing US financial institutions during the sub-prime mortgage crisis. It is thought that the bulk of the money will come from Chinese, Saudi and Kuwati investors.

The China Development Bank could provide as much as $9 billion and the Kuwait Investment Authority a further $1 billion. Prince Alwaleed bin Talal, the Saudi billionaire is also expected to inject money, although the amount is unclear. As much as $4 billion may be raised through a public placement of shares, although details of the proposals are not thought to be set in stone. It would come after a $7.5 billion investment by Abu Dhabi Investment Authority late last year.

Citigroup and Merrill Lynch are tipped by analysts collectively to report next week more than $25 billion of losses in the fourth quarter on mortgage-related investments.

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