UPDATE 2-BofA to end $118 bln asset-guarantee deal

* Will pay $425 million exit fee

* Facility was to back-stop against losses in Merrill deal

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By Joe Rauch

NEW YORK, Sept 21 (Reuters) - Bank of America Corp (BAC.N) will end a nine-month old, $118 billion program to share losses on bad assets and derivatives with the U.S. government, paying a $425 million exit fee, the bank said.

The bank and the government informally agreed to the loss-sharing deal in January, soon after Bank of America's acquisition of Merrill Lynch & Co, but never signed an official agreement.

Analysts and investors said the bank paid more to exit the program than they had expected, perhaps signaling its eagerness to repay its $45 billion of government funds as soon as possible.

"The government has them over a barrel," said Gary Townsend, chief executive of Hill-Townsend Capital in Chevy Chase, Maryland. The firm holds both common and preferred stock in the bank.

Jefferson Harralson, a Keefe, Bruyette & Woods Inc banking analyst, said the precise size of the fee was not likely important to the bank.

"BofA doesn't care if this is $250 million or $425 million," he said. "The real negotiation is the TARP repayment issue behind the scenes, and you can't get there without this."

As part of the deal, the bank would have had to pay an 8 percent dividend, or about $320 million a year, on $4 billion in stock warrants it gave the government.

Under the terms of the original agreement, Bank of America would have absorbed the first $10 billion in losses, and the U.S. government would have absorbed the next $10 billion. For the remainder of the covered assets, $98 billion, the losses would have been covered 90 percent by the U.S. government.

The agreement limited Bank of America's potential losses on the $118 billion portfolio to maximum losses of roughly $20 billion.

Citigroup Inc entered into a similar agreement with the U.S. government that it has not attempted to exit.

Initially, Bank of America sought to exit the asset-guarantee program without paying a fee, but the Wall Street Journal reported earlier on Monday a deal was near as the bank had softened its stance on an exit fee.

Bank of America also said the Federal Deposit Insurance Corp has approved its exit from the Temporary Liquidity Guarantee Program, the regulator's debt guarantee initiative.

(Reporting by Joe Rauch, Elinor Comlay and Dan Wilchins in New York, and Mark Felsenthal in Washington; Editing by Phil Berlowitz)