The embarrassing FTC action could cost the usually savvy mega-bank hundreds of millions of dollars in consumer refunds.

The complaint, the largest predatory lending case ever brought by the FTC, accused the Citigroup unit of using deceptive advertsing to lure low-income customers onto a "treadmill" of high-interest loans.

The complaint follows failed settlement negotiations between the FTC and Citigroup's CitiFinancial Credit Co.

"We would have preferred to settle so that we could get money into the hands of consumers more quickly," said Peggy Twohig, associate director for financial practices with the FTC.

She declined to comment on what parts of the proposed settlement caused the snag.

Citigroup also expressed regrets that a settlement could not be reached.

Citigroup acquired Associates First Capital Corp. for $31 billion only four months ago and merged it into CitiFinancial Credit. Citigroup hoped the buy would get its financial teeth deeper into Asia, where Associates has a presence, sources familiar with the bank said.

It is Associates' practices in the subprime lending market that spurred the FTC's investigation. That investigation was public knowledge at the time of Citigroup's purchase of Associates.

Associates First Capital Corp. at that time was the largest U.S. consumer finance company, lending principally in the very lucrative subprime market, which consists of borrowers who can't get credit - usually because of a poor credit rating or a limited income. This category often includes the elderly and minorities.

"Typical subprime consumers are people with a high credit risk but with some equity," Twohig said. "Subprime lending is not illegal," she added, "but the methods used [in Associates' case] are."

Those methods allegedly included aggressive solicitations and misleading and deceptive information that lures desperate people into loans that have hidden costs and tie them into a huge payments far into the future.

Since it's purchase in November, Citigroup has enhanced practices and procedures to resolve those concerns, the bank said.