Allstate Corp. and Citigroup Inc. agreed to settle a lawsuit filed by the insurer in New York state court accusing the bank of fraudulently selling hundreds of millions of dollars of mortgage-backed securities.

Allstate, the largest publicly traded U.S. home and auto insurer, sued Citigroup in State Supreme Court in Manhattan in 2011, along with banks including Deutsche Bank AG, Bank of America Corp. and Morgan Stanley.

The Northbrook, Illinois-based insurer, which said in the suit that it bought more than $200 million of securities from New York-based Citigroup that were backed by residential mortgages, voluntarily discontinued the case, according to a court filing dated yesterday.

Allstate and Citigroup settled the case on “mutually agreeable terms,” Daniel L. Brockett, an attorney with Quinn Emanuel Urquhart & Sullivan LLP representing Allstate, said in an e-mail. A Citigroup spokesman, Scott Helfman, declined to comment on the case in a telephone interview.

Justice Eileen Bransten in March denied bids by Morgan Stanley, Deutsche Bank and Bank of America to dismiss Allstate’s suits. In the case against Morgan Stanley, Bransten rejected an argument that the lender is shielded from liability because offering materials disclosed that representations about the loans were based on information from originators.

The case is Allstate Insurance Co. v. Citimortgage Inc., 650432/2011, New York State Supreme Court, New York County (Manhattan).

With assistance from Donal Griffin in New York. Editors: Charles Carter, Fred Strasser