Dec. 18 (Bloomberg) -- Citigroup Inc., the U.S. bank that got $65 billion in government funds to replenish capital after four straight quarterly losses, had its senior debt rating cut two grades by Moody’s, the first downgrade in a year.

The reduction to A2 from Aa3 reflects “weakened earnings prospects, in combination with an average quarterly preferred dividend of approximately $1.4 billion,” Moody’s said today in a statement. Citigroup won’t generate “significant retained earnings” though 2010, Moody’s said.

Citigroup last month received U.S. aid that shields the bank from losses on toxic assets and injects $20 billion of capital. The bank is selling off assets after reporting $67 billion of credit losses and writedowns related to the subprime- mortgage crisis.

“Citi has very strong Tier 1 capital and many sources of liquidity from our unique global franchise,” Citigroup said in a statement. “Any related contractual liquidity requirements resulting from today’s rating actions are covered many times over by our strong current cash box.”

Citigroup’s “cash box” had $50.5 billion as of Sept. 30, according to a regulatory filing.

The rating cut was based on “worsening” asset quality and the likelihood that Citigroup would see further declines in its “tangible” capital base in the next two years, Moody’s said.

The downgrade has no effect on the Federal Deposit Insurance Corp.-guaranteed debt issued by Citigroup, which remained Aaa with a “stable” outlook.

Moody’s said the debt action was moderated by the “very high” probability Citigroup will get systemic support from the U.S. government. The financial strength rating on the company’s lead bank, Citibank N.A., was lowered three grades to C from B.

Citigroup fell 40 cents to $7.43 at 4:15 p.m. in New York Stock Exchange composite trading, and the shares are down 75 percent for the year.

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: December 18, 2008 18:23 EST