Citigroup and the US Treasury have reached a deal that sees the government substantially increase its stake in the ailing bank from 8% to 40%.
The deal does not require extra taxpayer investment, but is dependent on Citi raising extra private capital.
Citi shares ended down more 39% as investors worried about their stake in the bank being diluted by the move.
As one of the banks hardest hit by the continuing credit crisis, Citi has already gained $45bn in Treasury cash.
It also has guarantees protecting it from the bulk of losses on $306bn (£216bn) of risky investments.
The latest agreement involves the government converting some of its preferred stock in Citi to common shares.
As part of the deal, the bank will suspend paying dividends and will also install new independent directors on its board.
The bank made an $8.29bn loss in the final three months of 2008, and was forced to split into two new firms.
The government will only raise its stake to match that put up by private investors, and it has said it preferred banks to remain in private hands.
The treasury's Capital Assistance Programme allows banks such as Citi to borrow money from the government if they need more capital.
Last week, Citigroup's share price fell below $2 to an 18-year low.
In November, the US Treasury announced a $45bn rescue plan for the bank, accompanied by a $306bn guarantee for Citi's most risky loans, as part of its Troubled Asset Relief Program (Tarp).
At present the government's preferred shares represent a 7.8% holding in the company.
The move means Citi shareholders will see their stakes diluted and the government will have a much larger influence over the bank.
Citigroup, which two years ago was worth $273bn and is now worth about £20bn, was brought to its knees by five quarterly losses in a row.
It has been battered by the meltdown in sub-prime mortgages - made to people on low incomes or with poor credit ratings.
A cost-cutting exercise last year resulted in some 52,000 jobs being slashed, bringing the Citi workforce down to about 323,000 people.
Analyst Peter Kenny, managing director at Knight Equity Markets in New Jersey said he did not think shares would be too badly hit by the announcement.
"We are talking about a form of nationalisation, and to the extent that the market is going to accept it," he said.
"The problem is that there is so much going on in terms of trying to manage the continuing and unfolding drama around the credit crisis.
The bottom line is that it's not like the government has much of a choice. Citi wasn't negotiating. The government was saying, 'This is what you have to do.'
"The government didn't want to have to take any more than it had to. This is the least they can do, and the most they can do without causing a wholesale sell-off."