NEW YORK (Reuters) - Online brokerage E*Trade Financial Corp <ETFC.O>, which has been pounded by credit woes in the mortgage business, is getting a $2.55 billion cash infusion from Citadel Investment Group, the Wall Street Journal reported Thursday, citing people familiar with the deal.

According to the Journal, Citadel will make a two-part investment in E*Trade in a bid to restore confidence and liquidity in the discount brokerage.

The first part of the deal is the purchase of E*Trade's entire $3 billion portfolio of asset-backed securities for a value around $800 million, the newspaper said.

The second component is the purchase of $1.75 billion worth of 10-year notes, paying an annual interest rate of about 12.5 percent, according to the Journal.

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Following the regulatory approval process, Citadel is expected to own a 20 percent stake in E*Trade, including the nearly 3 percent it already owns, and gain a board seat, the Journal said.

Representatives of E*Trade could not immediately be reached for comment.

Analysts have previously said E*Trade will have to pursue strategic alternatives, such as a deal or sale of some assets, after large losses in its mortgage segment.

Both TD Ameritrade Holding Corp <AMTD.O> and Charles Schwab Corp <SCHW.O> have said they might be interested in a merger, but have declined to say whether E*Trade could be a target.

(Reporting by Justin Grant; Editing by Paul Bolding)