Bond insurer MBIA Inc. said Monday it will receive a cash infusion of up to $1 billion from private equity firm Warburg Pincus to help bolster its capital reserves as it braces for mounting losses and writedowns in the fourth quarter.

The news helped lift MBIA shares by more than 13 percent in trading.

The investment comes as MBIA faces deteriorating credit markets that are likely to further strain its earnings and cash flow.

Armonk, N.Y.-based MBIA also said it will set aside reserves of $500 million to $800 million in the fourth quarter to cover estimates of probable losses related to residential mortgage-backed securities, particularly those backed by prime home equity lines of credit and close-end home equity loans.

MBIA also said it would take a further writedown on the value of its securities portfolio that is “significantly greater” than the third quarter’s $352.4 million writedown.

Warburg Pincus’ investment will help offset some of the losses in the fourth quarter.

Warburg Pincus will make an initial investment of $500 million by acquiring about 16.1 million shares of MBIA common stock for $31 per share. Warburg Pincus will cover unsubscribed shares worth up to $500 million as part of a shareholder rights offering MBIA is planning for the first quarter of 2008.

Warburg Pincus will also receive warrants to potentially purchase an additional 16.1 million shares at $40 per share over the next seven years.

MBIA said Friday it was looking for new sources of capital to cover any shortfalls it might have as credit markets deteriorated over the past few months.

Last week, credit rating agency Moody’s Investors Service said MBIA is “at greater risk of exhibiting a capital shortfall than previously communicated,” and the company’s rating could be downgraded.

Moody’s, Standard & Poor’s and Fitch Ratings are all reviewing the financial strength ratings of bond insurers, which sell contracts to reimburse owners of bonds if the issuers fail to repay.

Fitch said Monday it will take into account the capital infusion and expected fourth-quarter reserves and writedowns during its current review of the bond insurer. Fitch expects to complete its review next week.

In announcing in early November its review of bond insurers, Fitch initially said MBIA had a “low” probability of having its rating cut from “AAA.”

As defaults among loans have risen _ especially among subprime mortgages given to customers with poor credit history _ rating agencies began reviewing how those defaults could affect bond insurers. Many securities and bonds are backed by pools of the defaulting loans, meaning defaults among the bonds and securities are more likely.

If those bonds and securities default, it would trigger payments by the insurer.

MBIA said it would continue to review its capital management options, including reinsurance, issuance of debt and the issuance of securities to further increase cash flow.

As part of the deal, MBIA will also expand its board of directors by two members to 13, allowing Warburg Pincus to nominate two directors.

Shares of MBIA rose $3.95, or 13.2 percent, to close at $33.95 Monday. The stock has traded between $25.84 and $76.02 in the past year.