The report followed an announcement late last night from Citigroup and Merrill Lynch that they would buy back almost $20 billion such debt between them. “The rumors that they are close to a settlement are not unfounded,” the source said.

“Both Citigroup and Merrill Lynch announced retail programs. The one that UBS is rumored to announce will also cover institutional clients,” the source said. The size of the buy-back would be roughly $19.4 billion, the source said.

The move is likely to force UBS, Europe’s biggest casualty of the markets turmoil, to make further writedowns on the value of its assets beyond the $37 billion so far. JP Morgan reckons with about $1 billion in writedowns. Others estimated that such a move could cost UBS $1.8 billion.

UBS has been locked in a dispute with New York State, which accused the Swiss bank of steering broker clients into so-called auction-rate securities that became impossible to sell when the credit market froze. UBS now has a bill for the bonds at face value even though they are worth less.

UBS declined to comment beyond saying that it was “consistently working with regulators towards a comprehensive solution for all auction-rate securities investors.”