Treasury Minister Stephen Timms says Lloyds is committed to additional lending
The taxpayer is taking a controlling share of 65% in Lloyds Banking Group, up from the previous 43%.
The government has said new lending from Lloyds will jump to £28bn in the next two years, dwarfing similar figures from Northern Rock and RBS.
The taxpayer will also insure toxic loans worth £260bn ($367bn).
The group had to turn to the government for help following its takeover of HBOS, which recently reported an annual loss of nearly £11bn ($15.5bn).
BBC business correspondent Joe Lynam said: "The government is finally using its clout now with Lloyds Banking Group.
"Basically they're going to install their people on the board of Lloyds banking group and say, right, we're going to see £28bn is set aside for lending, " he said.
The Treasury Minister, Stephen Timms, spelt out what the deal involved.
He told the BBC the deal committed the banking group to £14bn in lending this year, of which £11bn would go to companies and £3bn for mortgages.
The takeover of HBOS, which the prime minister helped orchestrate, is responsible for dragging Lloyds into majority public ownership
There would then be a similar commitment next year, he said.
Mr Timms said: "It's a very important announcement. It provides new certainty for Lloyds enabling it to commit new lending into the economy.
"Lloyds will bear the initial loss on the assets being insured up to £25bn. It will pay a commercial fee of £16bn for participating in the scheme."
However Mr Timms admitted the government did not know how much of the total losses would be borne by the tax payer.
The Liberal Democrat treasury spokesman, Vince Cable, said the government now had to make sure Lloyds Banking Group made good on its commitment.
Mr Cable told the BBC: "The government can't now just sit back as it has with the other banks that it's taken over and just watch them.
"It has to make sure that they are run in the national interest - to make sure for example that they do make lending available to sound borrowers, particularly to companies which are not able to keep going because they can't get working capital."
Hugh Pym, BBC chief economics correspondent, said with other types of share taken into account, the government's voting stake in Lloyds Banking Group will, in effect, be 75%.
[They think] it would be simpler and easier for the government to nationalise the banks, and that in the long-term it would save the taxpayer a lot of money
BBC political correspondent
Our correspondent added that the deal, which was agreed on Friday night, would be "very awkward" for the Lloyds chief executive Eric Daniels and chairman Victor Blank.
They have come increasingly under fire from shareholders for their decision to buy rival HBOS.
It was the January takeover of HBOS - a move that was supported by the government - that has caused the problems at Lloyds.
Lloyds was forced to announced last week that HBOS made a pre-tax loss of £10.8bn in 2008, which it has had to absorb.
By contrast, Lloyds, or Lloyds TSB as it was then known, made a profit of £807m last year, albeit an 80% fall on 2007.
George Osborne, the shadow chancellor, said the government's latest move was proof that the first bailout had failed, and the test of it would be whether credit began flowing into the economy again.
"It is also clear that the takeover of HBOS, which the prime minister helped orchestrate, is responsible for dragging Lloyds into majority public ownership," Mr Osborne added.
The £260bn insurance deal is part of the Treasury's taxpayer-backed Asset Protection Scheme to insure banks' riskiest assets against further losses.
In the case of Lloyds, it is understood that the government's price will be a further 10% ownership of the group in the form of non-voting shares.
The scheme was put forward by Chancellor Alistair Darling in a bid to restore confidence in the banking sector.
Royal Bank of Scotland was the first bank to sign up, announcing last month that it would ask the government to insure £325bn worth of so-called toxic assets, which are difficult to value and currently cannot be sold.
BBC political correspondent Carole Walker said there were now many people in Westminster who believed that full nationalisation of the banks would restore confidence in the sector more quickly than the Asset Protection Scheme.
"[They think] it would be simpler and easier for the government to nationalise the banks, and that in the long-term it would save the taxpayer a lot of money," she said.
Some have pointed out that the government has put more money into RBS than its total share value, she added.
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