A major block of Geico Corp. stock -- about 10 percent of the Washington insurance firm's common shares -- has been purchased by Geico from insurance subsidiaries of a controversial Cincinnati company.

Geico, the holding company for Government Employes Insurance Co. and affiliated firms, announced yesterday that it will buy all 2.08 million shares owned by American Financial Corp. at $16 a share.

Geico Chairman John J. Byrne said the agreement to purchase AFC's holdings involves a total price of about $33.3 million -- $15 million in cash and $18.3 million in Geico debt securities that mature in 1999.

AFC, whose chairman and president is business conglomerateur Carl Lindner, will recognize a pretax gain of about $19.5 million from the transaction.

American Financial subsidiaries began buying up Geico shares -- as an investment and not as a takeover bid, according to documents filed with the D.C. government -- late in 1976 when a number of U.S. insurance firms purchased Geico shares as part of an industry-wide program to keep the automobile insurer solvent.

Over several years, AFC subsidiaries purchased Geico common and preferred shares that later were converted to common stock. As of last April 3, American Financial was the second-largest single owner of Geico common stock. The largest owner of Geico securities is Berkshire Hathaway Inc., a firm controlled by investor Warren Buffet of Omaha.

Geico officials said yesterday that, with the AFC purchase, the Washington holding company has completed a previously announced plan to buy up some of its own shares. Byrne said the principal purpose of the deal announced yesterday is to reduce the number of common-share equivalents outstanding.