By Nate Raymond and Jonathan Stempel

NEW YORK (Reuters) - The U.S. government urged that Bank of America Corp pay $863.6 million in damages after a federal jury found it liable for fraud over defective mortgages sold by its Countrywide unit.

In a filing late Friday in the U.S. District Court in Manhattan, the government also asked for penalties against Rebecca Mairone, a former midlevel executive at the bank's Countrywide unit who the jury also found liable, "commensurate with her ability to pay."

The government said the penalties were necessary to punish the bank and Mairone "and to send a clear and unambiguous message that mortgage fraud for profit will not be tolerated."

Bank of America and Mairone were each found liable for defrauding government-controlled mortgage companies Fannie Mae and Freddie Mac through the sale of shoddy loans purchased from Countrywide in 2007 and 2008.

The case centered on a mortgage lending process at Countrywide, which Bank of America bought in July 2008, known as the "High Speed Swim Lane," or alternatively "HSSL" or "Hustle."

The government said Countrywide's program emphasized and rewarded employees for the quantity rather than the quality of loans produced, and eliminated checkpoints designed to ensure that loans were sound.

The penalties the government requested are slightly higher than the amount lawyers in the office of Manhattan U.S. Attorney Preet Bharara had previously indicated they would seek, $848.2 million. The amount is based on the gross loss Fannie Mae and Freddie Mac incurred on the HSSL loans, the government said.

Bank of America, the second-largest U.S. bank, has previously said it is evaluating its options for appeal. It is scheduled to respond to the government's penalty request by November 20.

"We believe the filing overstates the volume of loans and the appropriate measure of damages arising from one narrow Countrywide program that lasted several months and ended before Bank of America acquired the company," Lawrence Grayson, a spokesman for the bank, said Saturday.

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In its filing, the government did not said it was holding off on recommending an amount to penalize Mairone until after it analyzed a financial disclosure form she provided Friday. The government also raised the question of whether Bank of America may indemnify her for the penalty.

Mairone joined JPMorgan Chase & Co after leaving the bank. She has denied wrongdoing.

"We intend, in our filing, to argue against the imposition of any penalty," Marc Mukasey, Mairone's lawyer, said in an email Saturday.

Penalties will be assessed by U.S. District Judge Jed Rakoff, who presided over the four-week trial in Manhattan.

The October 23 verdict was a major victory for the U.S. Department of Justice, which along with other regulators has been criticized by investors, politicians and others for failing to hold banks and individuals accountable for their roles in events leading up to the 2008 financial crisis.

Bank of America paid $2.5 billion for Countrywide, but analysts have said that acquisition has since cost the Charlotte, North Carolina-based bank tens of billions of dollars for litigation, loan repurchases and writedowns.

In October, Bank of America disclosed that staff of an unspecified U.S. Attorney's office plan to recommend that the Justice Department file a civil action against the bank related to the securitization of mortgages.

And in August, the government filed two civil lawsuits in North Carolina accusing the bank of understating the risks of about $850 million of mortgage securities. The bank moved to dismiss those case Friday.

The Hustle case, like some other financial crisis cases recently pursued by the government, was brought under the Financial Institutions Reform, Recovery, and Enforcement Act, a law passed after the 1980s savings-and-loan scandals.

That law carries a lower burden of proof than criminal cases, and a 10-year statute of limitations in which to bring cases, twice as long as in typical securities fraud cases.

The case is U.S. ex rel O'Donnell v. Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 12-01422.

(Editing by Doina Chiacu and Nick Zieminski)