Anonymous sources close to the matter told the newspaper that around $5 billion of the instruments would be bought back from investors, and a further fine of $100 million would be paid to Andrew Cuomo's office.
This represents a significant setback for Citi chief executive Vikram Pandit, who vowed earlier this year to restore the credit crunch-hit bank's battered balance sheet through a "get fit" programme.
Along with UBS, Citi had been accused by Mr Cuomo of wrongly presenting the securities as risk-free investments to customers.
An investigation into the alleged miss-selling from financial regulator the Securities and Exchange Commission is also ongoing.
Citi has suffered around $40 billion in credit crisis-related losses and writedowns over the past year.
The bank declined to comment yesterday on the alleged settlement deal with the attorney-general.