Citigroup's share price collapse was dramatically halted today when the US government stepped in to rescue the bank with a huge bailout plan including a $20 billion (£13 billion) capital infusion, guarantees for up to $306 billion of toxic assets and control of executive bonuses.

Under the deal, American taxpayers could end up owning nearly 8% of what was until recently the world's biggest bank.

The agreement with beleaguered Citigroup, which employs 12,000 people in London, followed a week in which its shares fell more than 60%, triggering fears of a run on the bank and rumours that chief executive Vikram Pandit would have to put the whole business up for sale or break it up.

In today's deal, Citigroup will have $306 billion of troubled mortgages and other assets guaranteed by the government and be given $20 billion cash from the taxpayer, added to the $25 billion received last month under the Troubled Asset Relief Program.

In return for the cash and guarantees, the government will get $27 billion of preferred shares, paying an 8% dividend.

Citi has agreed to reduce the company's dividend to just $0.01 a share for the next three years. Shares in the bank, which has $2 trillion of assets, and operations in 100 countries, today shot up more than 40% at one stage as investors bet that the business was not going to fail. The move also helped to boost global markets, including the FTSE 100 index, highlighting just how important the fate of Citi is to the global financial system.

"The rescue really was a must-do thing," said AMP Capital Investors strategist Nader Naeimi, "It they'd let Citigroup go, that would've been disastrous."

In an internal memo to staff seen by the Evening Standard, Pandit said: "This is an innovative, market-based solution that allows us to purchase insurance from the Fed to limit future risk...continue to assure your clients and customers that our fundamentals are strong and our determination to find solutions to drive their financial success is unwavering."

Citigroup has been one of the worst-affected banks since the start of the credit crisis and last week announced a further round of 52,000 job losses after Pandit convened a company-wide meeting in an attempt to boost flagging morale and convince sceptics that he was on top of its problems.

At the meeting, Pandit said Citigroup was better positioned to weather the crisis since he took over from Chuck Prince last December.

Pandit's leadership has been called into question and he and other executives have also come under fire for failing to turn Citigroup around quickly enough.