Major banks including Citigroup Inc are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets, in a bid to prevent the credit crunch from  further hurting the global economy, sources familiar with the matter said.

Representatives from the US treasury have organised conversations among top global banks, sources said, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.

A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the US or Europe into recession.

Global hangover

The fund is the latest response to a global credit hangover after at least three years of easy credit that fueled massive mortgage lending in the United States and spurred record levels of leveraged buyouts.

Citigroup, JPMorgan Chase & Co and Bank of America Corp are involved in the discussions, according to people familiar with the situation. The three banks declined to comment. The US treasury is involved in the discussions, but taxpayer money is not expected to be used.

The Financial Services Authority, the UK market regulator, has suggested UK banks consider participating in the fund, the Wall Street Journal reported on Saturday, citing a person familiar with the situation.