Lloyds shares have jumped 65% since March
Lloyds Banking Group has said it is looking to raise capital, as a way of avoiding entering the UK government's insurance scheme for riskier assets.
It planned to put £260bn of loans and investments into the Government Asset Protection Scheme (GAPS) in return for taxpayers taking a larger Lloyds stake.
The bank is now reconsidering, pointing to better economic conditions and a stronger performance of its loans.
But Lloyds, 43%-owned by the taxpayer, said "all options remain open".
The High Street lender is "in advanced discussions" with the Treasury, the Financial Services Authority and UK Financial Investments - which manages the UK government's stakes in bailed-out banks - over its potential participation in GAPS.
It has been in talks since the scheme was announced in March.
"Lloyds believes that any alternative proposals to GAPS would be likely to include a substantial capital raising," it said.
It said the capital raising would come either through a rights issue or through the "exchange of certain existing group capital securities", or both.
"There can be no certainty at this stage that any alternative to GAPS will proceed," Lloyds said.
Under GAPS, the government insures - for a price - some of the expected future losses on past investments made by our banks.
If those losses crystallised, some of them would in effect be transferred to the taxpayer.
However, if they did not, the taxpayer might make a profit on the premiums that the government will have charged.
One reason Lloyds is keen to minimise its use of GAPS is that it feels the fee it is charged by the Treasury is too expensive.
Even if it does not enter GAPS, Lloyds will have to pay a fee to the Treasury.
The bank said that this was "in recognition of the value of the implicit guarantee Lloyds has benefited from since the announcement of its intended participation".
Since the end of March, Lloyds shares have surged 65%.
Lloyds also confirmed that it was in talks with the European Commission over its state aid.
"Based on the discussions to date it is confident that the final terms of its restructuring plan, including any required divestments of assets, will not have a will not have a material impact on the group," it said.
Lloyds has been struggling since it bought HBOS last September. HBOS made a record loss in 2008 of almost £11bn.