Citigroup Inc is in early negotiations with the U.S. Securities and Exchange Commission (SEC) to settle a probe into whether it misled investors by not properly disclosing the amount of troubled mortgage assets it held as the markets started to fall in 2007, the Wall Street Journal said, citing people familiar with the matter.

An issue being debated inside the SEC is whether Citigroup, as a recipient of government-rescue funds, should pay a large penalty in the case, according to the paper.

A Citigroup spokesman told the paper that it is against the firm's policy to comment on such regulatory issues.

The SEC is also considering bringing cases against individuals related to disclosure of mortgage assets, the paper said, citing people close to the situation.

A Citigroup spokesman in Hong Kong was not immediately available for comment, while the SEC did not immediately return a Reuters email seeking comment that was sent outside of normal business hours.

(Reporting by Ajay Kamalakaran in Bangalore; Editing by Muralikumar Anantharaman)