Lawyers at the Securities and Exchange Commission (SEC) and New York attorney-general Eliot Spitzer's office are working together to reach a settlement with MBIA, the world's biggest bond insurer, by the end of next month.

Late last week, MBIA indicated it could face a civil lawsuit from state and federal regulators related to a reinsurance deal it entered into in 1998 that forced the group to restate seven years of earnings.

The company has received a so-called Wells notice from the SEC, which indicates that regulators might bring a civil lawsuit against the group, alleging it broke federal securities law.

Regulators are focused on a reinsurance deal MBIA arranged with Allegheny Health, Education and Research Foundation, a Pennsylvania medical group that declared bankruptcy in 1998 and defaulted on $265 million (€215 million) worth of bonds that MBIA had guaranteed.

Instead of taking a charge to cover its loss, MBIA entered into a series of so-called finite reinsurance contracts with three reinsurers Converium, Axa Re and Munich Re.

Last March MBIA corrected its accounts and restated its results for the past seven years after regulators questioned whether these contracts transferred adequate risk to qualify as insurance. The restatement reduced MBIA's profit by $54 million.

The possibility of regulatory problems at MBIA poses significant challenges since MBIA guarantees most of the bonds of big US companies.

If it were to be sued over its accounting, investors might start to doubt the stability of its creditors.

Finite risk reinsurance combines elements of financing with traditional insurance.

At the heart of the investigation by US regulators into these policies is whether they transfer adequate risk to be accounted for as insurance.

AIG's lawyers have said that they are also in talks with Mr Spitzer in an effort to reach a settlement.