Nov. 17 (Reuters) - The internal watchdog at the Securities and Exchange Commission cleared the agency's enforcement director of allegations he improperly intervened in a 2010 settlement with Citigroup Inc, according to a report released on Thursday.

The director, Robert Khuzami, did discuss the settlement in a private phone call with Citigroup's lawyer, the report said, but he did not commit to any specific deal.

The settlement was "part of a negotiation process that involved several members of the Enforcement staff" the report said.

"We are pleased that the report found the anonymous allegations were completely without merit," SEC spokesman John Nester said in a statement.

The audit, from SEC Inspector General David Kotz, clears Khuzami of allegations he "forced" his staff to drop some of the more serious charges against the bank on behalf of his friend and former colleague, who was Citi's lawyer.

Citigroup agreed in 2010 to pay a $75 million penalty for misstatements the SEC said it made about its exposure to subprime mortgages in 2007.

The SEC also sued Citigroup's chief financial officer and its head of investor relations, for their role in the mistakes, but did not charge them with fraud.

An anonymous whistleblower alleged the agency dropped fraud charges against the executives due to pressure from Khuzami, on behalf of Citi's lawyer Mark Pomerantz.

While Khuzami did speak to his friend, he did not agree to a deal and he called Pomerantz again to make clear they had not reached a settlement, the report said.

Khuzami also "reported back" to the SEC lawyers on the investigation and conducted "further discussions" before a final decision on the settlement.

Khuzami also told the staff lawyers that, if they were not "comfortable" with the settlement, he would reject it, according to the report, dated Sept. 27 and released on Thursday.

(Reporting by Aruna Viswanatha)

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