Federal regulators said Friday that investors who bought risky auction-rate securities from Merrill Lynch & Co. before the market for those bonds collapsed will be able to recover up to $7 billion under a new agreement.

Federal regulators say Merrill Lynch & Co. will buy back up to $7 billion in auction-rate securities over its role in selling the risky bonds to retail investors.

New York Attorney General Andrew Cuomo said regulators have reached settlements with Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank over their roles in selling risky auction-rate securities to investors.

New York Attorney General Andrew Cuomo and Merrill Lynch & Co. appeared to be close to a settlement over the investment bank’s role in selling auction-rate securities. A deal would avert a lawsuit the attorney general threatened against the company.

New York Attorney General Andrew Cuomo has been in all-day meetings with Merrill Lynch & Co. Chief Executive John Thain regarding a last minute settlement over auction-rate securities, according to a person familiar with the negotiations.

New York Attorney General Andrew Cuomo says he’ll file suit against Merrill Lynch & Co. over its role in selling auction-rate securities if the investment bank doesn’t reach an agreement with his office by the end of the day.

New York Attorney General Andrew Cuomo says he will send a letter to Merrill Lynch & Co. notifying the investment bank it will commence a legal action against it as part of wide-ranging investigation into the collapse of the auction-rate securities market.

Security regulators in Massachusetts have charged Merrill Lynch with fraud for allegedly promoting the sale of auction-rate securities when they knew the investments were risky.

Merrill Lynch & Co.’s latest move to clear failed credit market investments from its books is likely to pressure other financial companies to dump their troubled holdings _ and, like Merrill, at a steep discount. But another round of write-downs or asset sales won’t raise investors’ ever-sagging confidence in the sector.

Merrill Lynch says will sell most of its troubled asset-backed securities and terminate hedges linked to bond insurers, essentially wiping clean some of its riskiest positions.