Citigroup says the deal is done and the government is getting an increased stake in the struggling bank.
The U.S. government will exchange up to $25 billion in emergency bailout money for as much as a 36-percent equity stake.
The deal is contingent on private investors also agreeing to a similar swap.
But it will not require more taxpayer dollars.
The conversion will help provide Citi the mix of capital needed to withstand further weakening in the economy. The stock-conversion option gives the government greater flexibility in dealing with ailing banks. It also gives the government voting shares, and therefore more say in a bank's operations.
Investors appeared disappointed in the deal and expected dilution of their stake, sending shares plummeting 94 cents to $1.56 in premarket trading.
Citi will also reshape its board of directors.