NEW YORK (

TheStreet

) - Shares of bond insurer

MBIA

(MBI) - Get Report

are up nearly 8% at $9.11 after it agreed to dismiss a lawsuit against

Bank of America

(BAC) - Get Report

related to credit default swaps it underwrote for the bank's mortgage-backed securities that left it exposed to hundreds of millions of dollars in losses.

The dismissal of the suit prompted speculation that MBIA and Bank of America might soon reach a settlement on the deal.

MBIA sued Merrill Lynch in 2009,after the latter was acquired by Bank of America, alleging that the bank convinced it to offer protection against defaults on AAA rated mortgage-bond securities that were in reality backed by risky loans.

Earlier this year, the New York appeals court dismissed the case, saying that MBIA was a sophisticated investor and that it could not prove fraud on part of the bank. MBIA moved to appeal the dismissal, but appears to have now reconsidered the lawsuit.

"This is likely a precursor to a wider comprehensive settlement which resolves all outstanding litigation against Bank of America and MBIA," Manal Mehta, a partner at Branch Hill Capital, a hedge fund that invests in the insurer told

Bloomberg.

. "Any meaningful settlement will have dramatic positive implications for the credit quality of MBIA."

Harry Fong, an analyst with Ticonderoga Securities, has a buy rating on MBIA on Tuesday.

Shares of other bond insurers were rising on the news as well. Shares of

PMI

(PMI)

were up 4.8% at $1.40 and shares of

Radian

(RDN) - Get Report

were adding 1.8% to $4.36.

--Written by Shanthi Bharatwaj in New York

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