NEW YORK (Reuters) - Shares in bond insurer MBIA Inc <MBI.N> rose 8 percent on Tuesday after the company dropped a lawsuit against Bank of America <BAC.N>, a move one investor said could lead to a larger settlement.
MBIA shares rose to $9.14 in late-morning trading. They peaked at one point at $9.45, their highest level since mid-May.
In a court filing on Monday, MBIA said it would drop its lawsuit against Bank of America's Merrill Lynch unit, abandoning claims that Merrill fraudulently misled MBIA into insuring $5.7 billion in risky debt.
MBIA's case teetered after a New York appellate court dismissed the lawsuit in February. The company planned to appeal to the state's highest court, but the two sides have agreed to dismiss the case, the filing said.
The dismissal "is likely a precursor to a wider, comprehensive settlement which resolves all outstanding litigation against Bank of America and MBIA," hedge fund manager Manal Mehta of Branch Hill Capital wrote in a note on Tuesday.
There is precedent for such a deal after the bank reached a $1.6 billion settlement in mid-April with MBIA competitor Assured Guaranty <AGO.N>.
Any deal likely would end concerns about MBIA's capitalization, the subject of an ongoing legal battle, Mehta said.
New York's top appellate court in late June reinstated a lawsuit by some of the world's biggest banks, claiming that a 2009 restructuring left parts of MBIA undercapitalized. BofA is among the plaintiffs in that case.
MBIA was the world's largest bond insurer until the mortgage crisis left it facing massive claims and it lost its "AAA" credit rating. While the company's municipal bond unit still has an investment-grade rating, it is not writing new business while the various legal challenges play out.
(Reporting by Ben Berkowitz. Editing by Robert MacMillan)