Lloyds completed its takeover of HBOS in January
Taxpayers will benefit after shareholders in Lloyds Banking Group supported a new share sale.
Shareholders have strongly supported a rights issue - buying 87% of new shares that were offered -allowing the bank to repay £2.3bn of bailout funds.
The remaining 13% was sold to investors on the open market, the bank said.
The government said it was a sign of faith in the banking sector but analysts said that appetite was strong because the stock was discounted.
The offer had been underwritten by the Treasury, meaning any shares not taken up would be bought by the government.
That would have increased the stake in the bank owned by UK taxpayers from 43% to about 65%.
Lloyds was raising the cash to replace £4bn in government-owned preference shares with ordinary shares.
It wants to pay off those preference shares - issued during last autumn's financial crisis - because they cost it £480m in dividend payments every year.
"We believe our shareholders will welcome removal of the dividend blocker," said Eric Daniels, the bank's chief executive.
In January, Lloyds completed its takeover of Halifax Bank of Scotland (HBOS)
The government backed the deal, bypassing normal competition rules to avoid the collapse of the Halifax owner.
But HBOS losses were far heavier than Lloyds realised, making the deal less attractive than it first appeared, with the group expected to plunge into the red this year.
The takeover was branded "a disaster" at Lloyds' annual meeting in Glasgow on Friday and chairman Sir Victor Blank is to stand down.
Under the terms of the rights issue deal, the 13% of shares that were not taken up by shareholders were sold on the open market.
LLOYDS & HBOS
September 2008: Lloyds TSB says it is to take over HBOS following a run on HBOS shares prompted by its exposure to the credit crisis.
October 2008: As part of government plans to recapitalise the banks, Lloyds TSB and HBOS receive £17bn of public money between them
January 2009: Merger completed - Lloyds banking Group created
March 2009: Lloyds forced to announced that HBOS made a pre-tax loss of £10.8bn in 2008, which it has had to absorb
May 2009: Lloyds chairman Sir Victor Blank says he will step down - as anger swirls about how the merger has hit Lloyds' shareholders
June 2009: Lloyds share issue gets strong take up
The shares were sold at 60 pence - 21.57p more than the 38.43p offer price and the profits will be split among shareholders who did not take part in the fundraising.
Observers said that while the price of shares was about half that of the current market value, the investor support would be welcomed given the challenges facing the bank.
Despite the strong take-up for the share issue, Lloyds shares fell sharply as investors took profits on recent gains. They were down 8% at 61.1 pence.
City Minister Lord Myners welcomed the take-up as "very real progress" saying it was "extremely difficult" to imagine raising such equity three months ago.
"I think we have now moved into a new territory in which institutional investors are saying 'We now have confidence in UK banks, their capital is strong and they are clearly again lending and supporting the UK economy'", he told the BBC.
"I think there is still a great deal to be done. The world economy is still in a very nervous condition, but there are some signs in areas traditionally regarded as leading indicators that the underlying economy is moving to a position where improvement can be envisaged."