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 absolutely imposing its writ on the banks that it now controls.
'No more dice'
"It is saying we will impose political decision-making on a bank, rather than just commercial or financial decision-making.
"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.
"This is the last throw of the dice before full nationalisation of Lloyds and RBS."
THE TOXIC ASSET BREAK-DOWN
83% of the £260bn toxic assets came from HBOS
17% come from the books of Lloyds TSB
Of the toxic assets, £151bn are in corporate and commercial loans
£74bn comes from residential mortgages
£18bn in unsecured personal loans
Chancellor Alistair Darling said the deal was a vital step in giving banks the confidence to increase their lending.
"Lloyds' commitment to lend an additional £14bn this year, on top of the £25bn committed by RBS, gets to the heart of the problems we face... by easing the flow of credit," he said.
"Restoring our banks to full health and ensuring they are able to support creditworthy families and businesses is an essential part of any plan for recovery."
Treasury Minister Stephen Timms said the deal legally committed Lloyds to £14bn in lending this year, of which £11bn would go to companies and £3bn for mortgages.
There would then be a similar commitment next year, he said.
No way out
Asked about speculation that the taxpayer could lose up to £100bn on the deal, Mr Timms replied: "Precedents would suggest that the loss would be a great deal less than that but as I said we just don't know."
Shadow chancellor George Osborne said the bank must now help revive the economy.
He told the BBC: "The real question is, are we going to get value for money?
"Because Britain has now spent more on bailing out its banks than any other country in the world, given our size, and we've got precious little to show for it."
Liberal Democrat treasury spokesman, Vince Cable, agreed.
We've had good, grown-up conversations with the government
Lloyd's spokesman Shane O'Riordain
"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," he told the BBC.
The BBC's chief economics correspondent, Hugh Pym, said the deal would be awkward for Lloyds' chief executive Eric Daniels.
Mr Daniels has been criticised by shareholders for pushing through the merger with HBOS despite big holes in its balance sheet.
The Lloyds boss said the latest deal was "appropriate".
"Our significantly enhanced capital position will ensure the group can weather the severest of economic downturns and emerge strongly when the economy recovers," he said.
"We believe this is an appropriate deal for our shareholders."
Lloyd's spokesman Shane O'Riordain said the deal struck with the government on Friday night would benefit all concerned.
'Benefit to all'
He told the BBC: "We've had good, grown-up conversations with the government. We've been keen to protect the interests of our shareholders - which is what we're paid to do.
"The government, on the other hand, has been very interested in protecting the taxpayer, and I think we've got a deal which meets these requirements."
It was the January takeover of HBOS - a move that was supported by the government - that has caused the problems at Lloyds.
Lloyds announced last week that HBOS made a pre-tax loss of £10.8bn in 2008, which it has had to absorb.
[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
Carole Walker BBC political correspondent
By contrast, Lloyds, or Lloyds TSB as it was then known, made a profit of £807m last year, albeit an 80% fall on 2007.
The £260bn insurance deal is part of the Treasury's taxpayer-backed Asset Protection Scheme to insure banks' riskiest assets against further losses.
The scheme was put forward by Mr Darling to try 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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