(Reuters) - Bond insurer MBIA Inc and Bank of America Corp have reached a settlement in an ongoing legal dispute, and BofA will pay MBIA $1.6 billion, a source familiar with the matter said on Monday.

MBIA shares, which were temporarily halted, rose 50 percent in afternoon trading to their highest since September 2008. Representatives of the two companies were not immediately available to comment.

Last week, a New York state judge ruled MBIA could pursue a case against Bank of America over toxic mortgage-backed securities.

In addition to that dispute, Bank of America had also been challenging MBIA's 2009 restructuring. A state judge dismissed that lawsuit in early March.

News of the settlement was earlier reported by Dow Jones.

(Reporting by Karen Freifeld, Lauren Tara LaCapra and Ben Berkowitz; Editing by Maureen Bavdek and Andre Grenon)