The payment resolves claims that shareholders ended up with massive losses after the bank failed to take timely write-downs on debt obligations - many backed by subprime mortgages - and engaged in self-dealing transactions that hid the risks.
In their 547-page lawsuit, the shareholders described those losses as "ticking time bombs that eventually exploded back onto Citigroup's balance sheet."
Citigroup, which employs around 10,000 staff in London, made a total loss of $27.68bn (£17.49bn) in 2008 but denied wrongdoing in agreeing to settle.
The bank said it wanted to avoid higher legal costs.
It called the accord "a significant step toward resolving our exposure to claims arising from the period of the financial crisis."
Investors have sued an array of US banks over their conduct leading up to and during the 2007-2008 financial crisis.
The Citigroup case began in 2008.
Wednesday's agreement followed mediation before a retired federal judge and the gathering of nearly 40 million pages of documents, according to court papers.
Solicitor Ira Press, who represented shareholders, said: "Based on the allegations and the risks we faced in establishing liability and damages, and in comparison with other securities fraud class-actions, the settlement is a very good result."
Fourteen current and former Citigroup executives had also been sued, including chief executive Vikram Pandit and his predecessor Charles Prince.
It is not clear whether any of them or their insurers are responsible to pay any of the settlement, which must still be rubber-stamped by a court in January.
Citigroup shares closed Wednesday up 57 cents, or 1.9%, on the New York Stock Exchange.
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