Investigators are looking at whether Fidelity's relationship with Goldman may have given the mutual fund giant an incentive to sell the instruments, the paper said.

The attorney general started focusing on the relationship after it learned that most of the auction-rate securities sold by Fidelity were underwritten by Goldman.

These securities offered interest rates that reset periodically in auctions, but when those auctions failed this year, investors were stuck holding longer-term debt of uncertain value. Dealers have been accused of understating the debt's risk to investors.

Earlier this month, Merrill Lynch & Co Inc , Deutsche Bank and Goldman Sachs settled with U.S. securities regulators, agreeing to buy back billions of dollars of auction-rate securities.

The attorney general's office is probing whether Fidelity may have marketed Goldman-underwritten ARS's because it was getting other services from the investment bank, the paper said.

Goldman Sachs was not immediately available for comments.

"There was no incentive for Fidelity to promote auction-rate securities," the paper quoted Fidelity spokesperson Anne Crowley as saying. She said 600 Fidelity accounts held the auction-rate securities.

Goldman Sachs agreed to buy back about $1.5 billion in auction-rate notes by November 12, and pay a $22.5 million fine.

Goldman's agreement does not cover customers who bought auction-rate securities from Fidelity. Massachusetts's top regulator, William Galvin, has called on Fidelity to buy back all the securities it sold.

Fidelity, which is privately held, has long said it neither issues nor aggressively markets these securities and that it expects underwriters who issued the securities to stand behind them.

(Reporting by Saumyadeb Chakrabarty in Bangalore)