By Joseph A. Giannone

Under the terms of the deal, which has not yet been completed, the Boston-based giant mutual fund firm and brokerage would buy back $300 million of auction-rate securities from its customers. It would be the first settlement by the state with a "downstream" brokerage, following similar agreements forged with nine large investment banks that underwrote the securities.

Cuomo's office declined to comment.

"We do not have any agreement with any regulator," Fidelity spokeswoman Anne Crowley said.

Closely held Fidelity, urged by its home state of Massachusetts to assist customers stuck with illiquid auction-rate securities, said it is not like the investment banks that have settled with state and U.S. regulators.

"Fidelity is very different. We did not issue these securities and we did not underwrite or auction them," Crowley said.

Earlier this week, Massachusetts' top securities regulator William Galvin said his office had not moved any closer to reaching an agreement with Fidelity. Galvin's office declined comment on news of the latest Cuomo development.

Regulators have been pushing banks and brokers to repurchase billions of dollars of securities that were long billed as safe, cash-like investments bought and sold in weekly or monthly auctions. In January, auctions managed by the big banks began to break down, preventing investors from cashing out their securities.

Cuomo and other officials have been probing how banks marketed these securities, and whether they still sold them even as bankers expressed concern that credit market turmoil was making it harder to complete auctions.

(Reporting by Joseph A. Giannone; additional reporting by Svea Herbst; editing by John Wallace and Gerald E. McCormick)