JP Morgan has agreed to a record $13 billion (€9.6 billion) settlement after admitting it routinely overstated the quality of mortgages it was selling to investors, federal officials have said.

The behaviour that the largest US bank admitted to, authorities said, is at the heart of what inflated the housing bubble: lenders making bad mortgages and selling them to investors who thought they were relatively safe. When the loans started turning bad, investors lost faith in the banking system, and a housing crisis turned into a financial crisis.

The civil settlement marks the end of weeks of tense negotiations between JPMorgan Chase, which is looking to move past the legal issues that have plagued it for more than a year, and the US government, which is under pressure to hold banks accountable for behavior that led to the financial crisis.

JPMorgan said it has set aside all the funds it needs to cover the settlement, meaning the deal will have no impact on its earnings. The deal resolves most of its mortgage issues with federal authorities, the bank said. JPMorgan’s shares rose 0.7 per cent to close at $56.15 yesterday.

But even after the settlement, the bank faces at least nine other government probes, covering everything from its hiring practices in China to whether it manipulated the Libor benchmark interest rate. It may still also face criminal charges linked to mortgage matters. The bank's outspoken chief executive, Jamie Dimon, avoided the worst pitfalls of the financial crisis, but now is discovering he did not avoid all of them.

The bank said last month it had set aside $23 billion to cover litigation expenses. Yesterday, it said it has set aside enough to cover this settlement.

Meanwhile, the US justice department, which led the negotiations with JPMorgan, said that JPMorgan was not a solitary investigation.

"The justice department's financial fraud investigations are far from over," US attorney general Eric Holder said in a statement.

At issue in the settlement was the long chain of parties between the original mortgage lender and the ultimate investor in the loan in the years leading up to the crisis.

Often smaller lenders would make subprime mortgage loans, and sell them to a bank, which would package loans into bonds, and in turn sell them to investors. With so many middlemen, investors had poor information about what they were buying, and capital flowed to loans that arguably should never have been made.

“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Mr Holder in a statement.

The investors that bought these mortgage bonds demanded that the loans be of a particular quality. JPMorgan said the loans met the guidelines, but one of its employees said they did not, the bank admitted.

Outside firms that reviewed some of those loans for JP Morgan in 2006 and 2007 said that 27 per cent of them did not meet underwriting guidelines, but the bank still packaged at least half of those into mortgage securities, the government said.

JPMorgan's chief financial officer Marianne Lake said on a conference call that the bank did not admit to any violations of law, and does not believe the facts it admitted to have any bearing on remaining litigation.

A person involved in the negotiations said the 11-page statement of fact that the bank admitted to was the subject of prolonged negotiation.