WASHINGTON/NEW YORK (Reuters) - The Treasury on Monday pledged to sell its 7.7 billion Citigroup Inc C.N shares this year, a step that further reduces the government's influence on the banking giant.

The Treasury, which acquired an outsized stake in the bank during bailouts in 2008 and 2009 said it would sell its common shares into the market “in an orderly and measured fashion.” The United States owns 27 percent of the bank’s shares, and stands to earn about $7 billion profit if it can sell near current values -- bringing its total estimated profit to more than $15 billion.

The Treasury said the sale will be based on a prearranged trading plan and the manner, size and timing of sales will be "dependent upon a number of factors." Morgan Stanley MS.N is advising the United States on the share sale.

The plan provided some relief to investors who feared all 7.7 billion shares would hit the market at once.

“Everyone knew that Treasury was going to sell the stock. The question was how,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC, a Bedford Hills, New York money manager with $2 billion in assets.

Investors worried Citigroup would announce a Dutch-style tender or a lump-sum secondary stock offering that would drag down the share price. Instead, a preset sales plan means a trickle of shares will enter the market every day.

“This is a much kinder and gentler way,” said Ghriskey, who owns Citigroup shares.

The bank’s shares fell 3.25 percent to $4.17 after the Treasury announced its plans. The orderly sale had been discussed in media reports for days, and many investors bought Citi shares when the deal was rumored and sold when it was announced, analysts said.

Treasury plans to release its contract with Morgan Stanley within 48 hours, a Treasury spokeswoman said.

Spokespersons for Citigroup and Morgan Stanley declined to comment.

PROFIT MOTIVE

A profitable exit of the Citi stake would mark a “great PR victory for the Obama administration”, said Greg Valliere, Washington policy analyst for Soleil Securities in New York.

“There are many skeptics who never thought this day would come. The Democrats are on a sugar high right now and will spin this as a big plus that their handling of the bailout worked,” he said.

The profit could contribute to a turnaround in sentiment toward the Obama administration after the healthcare reform passage, a nuclear arms deal with Russia and signs of rebound in the economy, he said.

However, a return to normality for one of the biggest bailout recipients could hinder prospects for financial reform legislation, which aims to end the need for such bailouts, Valliere said.

“But I think that a bill will get done,” Valliere said.

HANDS-OFF

The government’s plans to sell its Citi shares marks another step in the withdrawal of the United States as a major stakeholder in the company, which began during the financial crisis in 2008.

“This is the last of the big-bank rescues and it was the biggest of the big-bank rescues,” said Doug Elliott, Brookings Institution senior fellow and former JPMorgan investment banker. “This is good news for everybody.”

After the sale, the United States will continue to hold about $5.3 billion Citigroup trust preferred securities. The bank raised more than $20 billion of capital in December to buy trust preferred securities held by the United States.

That transaction removed Citigroup from the category of banks receiving extraordinary assistance from the government, which meant the pay czar no longer had say over how the company pays its top employees.

The Treasury said the common share sales will not affect the remaining trust preferred securities or its warrants to purchase Citigroup shares, which is a potential source for further profits on the Citi bailout.

The warrants are worth between $140 million and $450 million, according to Linus Wilson, an assistant professor of finance at University of Louisiana at Lafayette.

Treasury has already banked an $8.1 billion profit on its sale of preferred shares.