Berlin's city government is to sell an 81% controlling stake in the Landesbank Berlin (LBB) bank group in a deal worth 5.35bn euros ($7.1bn; £3.5bn).
LBB nearly collapsed in 2001 and the European Commission let the city of Berlin bail out the lender, as long as it agreed to sell its holding by 2008.
Germany's DSGV savings bank association will buy the stake.
The move may prove controversial as it will stop a private sector firm buying what is in effect a public lender.
Germany has three types of banks - private sector, such as Deutsche Bank and Commerzbank, co-operative lenders, and banks such as LBB, which are independent but backed by local or regional governments.
Highest bidder
DSGV already owns shares in LBB and said the purchase would take its holding up to just below 92%.
The company added it would make an offer for the rest of the shares it did not own.
LBB was previously known as Bankgesellschaft Berlin, and controls the Berliner Sparkasse group of banks.
Thilo Sarrazin, Berlin's finance minister, said that DSGV outbid its rivals including Commerzbank to secure the LLB purchase.
Had Commerzbank won the bidding then it would have seen a publicly owned bank sold off to a private sector lender, analysts said.
DSGV said it did not plan to break up LBB, which has about 8,000 staff.
LBB shares added 5.7% on the news in Frankfurt.
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