Citigroup was last night in advanced discussions with the US Administration to create a “bad bank” to house about $50 billion (£33.4 billion) of its most risky assets. It would be partially backed by taxpayers’ money.

Although the deal had not been finalised last night, creation of the new vehicle, which would remove the risk of the entire group being dragged down by its toxic assets, looked to be the most likely of several options under discussion to safeguard Citigroup’s future. However, one source cautioned that the situation was still “very fluid” and that the “bad bank” discussions could yet fall through.

Under the terms discussed, Citigroup would move tens of billions of dollars of its most risky loans and securities into a separate entity and agree to absorb the initial losses on those assets. The Government would cover any losses beyond a point that had yet to be finalised last night.

It was also not clear last night whether the Government would take an equity stake in Citigroup in return for backstopping the new vehicle, whether it would grant the bank an additional loan to help to finance the entity and whether it would demand management changes as a condition.

As they took part in the “bad bank” discussions, Citigroup executives continued to push for a public expression of confidence from the US Administration as they pursued measures to put a floor under Citi’s tumbling share price. The bank, which has received a $25 billion federal capital injection, believes that, even without federal funds, a vote of confidence from the Government would reassure clients and customers that its capital base is sound.

Citigroup is desperate to boost its share price after mounting concern that it would need another government cash injection – which would dilute investors’ ownership of the bank – helped to push down its stock by 60 per cent last week. A public pronouncement is one of a series of measures that Citigroup was discussing with the Government last night as the bank sought to agree, and announce, a solution to its share price woes before the markets opened.

A government statement would imply that the Administration was willing to stand behind Citigroup if it came to the brink of collapse. It would reassure shareholders and customers and clients because the Government would not endorse Citi unless it had analysed risks on the bank’s balance sheet and determined that it had sufficient capital to meet further losses.

Meanwhile, the Federal Reserve and the Treasury are also thought to have sounded out a number of American banks, including Goldman Sachs, to ascertain whether they may be prepared to do a deal with Citigroup if it were to collapse. Any deal is likely to be similar to JPMorgan’s takeover of Bear Stearns, in which the Government guaranteed $29 billion of Bear’s most toxic debts as an incentive.

HSBC is reported to be sizing up some of Citigroup’s assets in Asia and Latin America if the American bank decides to dispose of some of its businesses to secure additional cash.

The discussions over the weekend came as Citigroup ran an advertisement in American newspapers that emphasised that the bank was “providing stability” and would “rise to the challenges and take advantage of new opportunities”. The advert is scheduled to run in Britain, where Citigroup staff are expected to learn this week who among them will be made redundant in the round of job cuts that was announced last Tuesday.

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