Updated from 6:53 a.m. EST

The U.S. government said Friday it plans to invest an additional $20 billion in Bank of America ( BAC - Get Report) and provide "protection against the possibility of unusually large losses" on an asset pool of about $118 billion of loans, securities and other assets.

The Treasury and the Federal Deposit Insurance Corp. said the large majority of the assets were assumed by Bank of America from its acquisition of Merrill Lynch. The assets will remain on Bank of America's balance sheet.

Meanwhile, escalating credit losses and significant writedowns drove the bank to report a loss of $2.39 billion, or 48 cents a share, and slash its quarterly dividend to a penny. A year earlier the bank reported a profit of $215 million, or 5 cents a share.

Merrill Lynch, which was acquired by Bank of America last year, posted a loss of $15.31 billion, or $9.62 a share, for the period.

The company reported a profit of $4 billion for the year.

Bank of America will issue preferred shares to the Treasury and FDIC. In addition, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan, a government statement said.

Treasury will invest $20 billion in Bank of America from the Troubled Assets Relief Program in exchange for preferred stock with an 8% dividend. The bank will comply with enhanced executive compensation restrictions and implement a mortgage loan modification program, Treasury said.

The injection of fresh capital will come from the government's $700 billion rescue fund and will be similar to assistance provided in November to another troubled bank, Citigroup ( C - Get Report).

Before the new support package, Bank of America had received a total of $25 billion in capital injections from TARP, including $10 billion for Merrill Lynch.

In a statement, Treasury said the new support was designed "to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

Even with the government aid, Bank of America's stock has been pummeled.

Shares of the Charlotte, N.C.-based bank are down more than 27% this year -- dropping to their lowest level in 18 years. The stock fell $1.80, or 17.5%, to $8.40 in late afternoon trading Thursday after trading as low as $7.35 earlier in the session.

Bank of America declined comment on the new aid package on Thursday.

Analysts polled by Thomson Reuters, on average, expected Bank of America to earn 8 cents a share during the quarter and $1.15 a share for 2008.

The Treasury Department already has pledged the first half of the $700 billion bailout fund, which Congress approved on Oct. 3, to deal with the nation's financial crisis.

President George W. Bush, on behalf of President-elect Barack Obama, asked Congress to release the second half of the bailout fund earlier this week and on Thursday the Senate voted 52-42 to turn aside an attempt by opponents to block the release of the remaining $350 billion from the bailout fund.

In premarket trading, shares of Bank of America were going for $8.55. The stock closed at $8.32 on Thursday.

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