(Reuters) -- Citigroup Inc has agreed to pay $158.3 million to settle U.S. civil claims that it defrauded the government into insuring thousands of risky home loans made by its CitiMortgage unit.

Wednesday's settlement resolves claims under the federal False Claims Act against the third-largest U.S. bank, and arose from a "whistleblower" lawsuit brought by Sherry Hunt, a CitiMortgage employee in Missouri.

According to settlement papers, CitiMortgage "admits, acknowledges and accepts responsibility" for misleading the government into insuring risky home loans. Investigators said the misconduct lasted for more than six years.

The civil fraud case is the third by the U.S. Attorney's office in Manhattan since May 2011.

It is part of a crackdown against lenders that investigators believe contributed to the housing crisis by originating risky home loans that should not have been made, insured or sold.

The government accused Citigroup of falsely certifying that many of its loans qualified for insurance from the Federal Housing Agency, which is part of the U.S. Department of Housing and Urban Development.

Investigators said 9,636, or more than 30 percent, of nearly 30,000 HUD-insured mortgage loans that Citigroup made or underwrote since 2004 have defaulted, costing the agency nearly $200 million in insurance claims.

"For far too long, lenders treated HUD's insurance of their mortgages like they were playing with house money," U.S. Attorney Preet Bharara said in a statement. "In fact, they were playing with other people's money and other people's homes."

WHISTLEBLOWER

Citigroup spokesman Mark Rodgers said the bank is pleased to settle. "We take our quality assurance processes seriously and have pro-actively undertaken process improvements to ensure that they are as robust as possible," he said.

Rodgers also said Citigroup has set aside enough money to cover the payout. The bank had said last week it was taking a $125 million after-tax charge against results for its just-completed fourth quarter in connection with mortgage litigation.

Cases brought under the False Claims Act have recovered more than $34 billion in federal and state cases since the law was amended in 1986, according to the Taxpayers Against Fraud Education Fund.

Whistleblowers often receive part of settlement sums in such cases. It was not immediately clear how much Hunt might recover. Her lawyer, Finley Gibbs, did not immediately respond to a request for comment.

The $158.3 million payout is separate from New York-based Citigroup's agreement to pay as much as $2.22 billion under last week's roughly $25 billion U.S. settlement with five big mortgage servicers over alleged foreclosure abuses.

DEUTSCHE BANK, ALLIED HOME

Last May, the government accused Deutsche Bank AG and its MortgageIT Inc unit in a $1 billion False Claims Act case over misleading HUD into insuring risky mortgages.

Six months later, it filed similar charges against Houston-based Allied Home Mortgage Capital Corp, which had billed itself as the largest privately held U.S. mortgage broker.

Deutsche Bank and Allied Home have fought the charges. Andrew Levander, a lawyer for Deutsche Bank, and Bruce Alexander, a lawyer for Allied Home, did not immediately respond to requests on Wednesday for comment.

The Citigroup settlement was approved by U.S. District Judge Victor Marrero in Manhattan, Bharara said.

Shares of Citigroup were down 17 cents at $31.91 in afternoon trading on the New York Stock Exchange.

The case is U.S. ex rel. Hunt v. Citigroup Inc et al, U.S. District Court, Southern District of New York, No. 11-05473.

(Reporting By Jonathan Stempel in New York; Additional reporting by Rick Rothacker in Charlotte, N.C. and Aruna Viswanatha in Washington, D.C.; Editing by Matthew Lewis and Gerald E. McCormick)

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