US banking giant, Bank of America, is to take over the country's biggest mortgage lender, Countrywide Financial, in a $4bn (£2.04bn) deal.
Countrywide was a key participant in the sub-prime market
Analysts said the deal was a lifeline for Countrywide, which was rumoured to be close to bankruptcy.
The firm - a key participant in the sub-prime sector - had been hit by the severe downturn in the housing market.
Countrywide saw a 44% drop in home loan volumes in December and its highest level of foreclosures since 2002.
Nancy Bush, banking analyst at Nab Research said: "This takes out a major point of uncertainty in the industry.
"It's certainly good for financial stocks overall. It's a tremendous beneficial deal for the whole financial services industry."
But Rick Meckler, president of investment firm Libertyview Capital Management, said: "The negative side is that Bank of America needed to step in, and there's still a lot of value lost by Countrywide shareholders.
"(Also) it's naive to think we're at the end of the process in terms of recognising losses from the mortgage crisis."
Analysts said much uncertainty remained as to what the deal meant for both firms and their shareholders, a key factor in sending Countrywide shares 18% lower by close of trade on Friday.
Kathleen Shanley, an analyst at Gimme Credit said: "The big issue is whether Bank of America can get comfortable enough with the credit quality issues to move forward without any commitments of support from bank regulators."
In August, Bank of America had invested $2bn in Countrywide.
Sub-prime lenders gave loans to those with poor credit records or unpredictable incomes.
During the housing boom, a huge number of people took out mortgages to take advantage of lower borrowing costs.
But with US interest rates climbing over the past two years, many borrowers have been unable to repay their monthly loans, prompting huge defaults and repossessions.
In a statement after the takeover deal was announced, Bank of America chief executive Kenneth Lewis said: "We are aware of the issues within the housing and mortgage industries. The transaction reflects those challenges."
Under the terms of the deal, Countrywide shareholders will receive 0.1822 of a Bank of America share for each Countrywide share.
The deal values Countrywide at $7.16 a share, down 7.6% on Thursday's closing price.
The bank says it expects to make after-tax savings of $670m from the combined company by 2011.
Mr Lewis said Angelo Mozilo, the chief executive of Countrywide Financial and the firm's co-founder, would be unlikely to have a management position once the transaction was completed.
"I would want him to stay until the deal gets done, and then probably I would guess that he would then want to go have some fun," Mr Lewis said.
Mr Mozilo has faced severe criticism from those who say he promoted lending policies that contributed to the housing slowdown, by providing loans to those who would find it hard to pay them back.
Critics have also objected to the size of Mr Mozilo's pay package. If the deal goes ahead, Mr Mozilo could receive about $36.4m, according to pay experts and regulatory filings.