The aid would involve a new capital injection that would increase the government's stake in the troubled bank, but would not constitute nationalization, which has been a major concern for investors.

The news pushed US stocks higherinitially and helped spark rallies in Europe and Asia.

Sources say bank executives are hoping the govenment stake will top out at about 25 percent, athough it is possible it could be as high as 40 percent. In either case, if the govenment converts its current preferred-stock status to common shares, Citi shareholders would see their stakes diluted and the government would potentially have a much larger influence over Citi.

Treasury spokesman Isaac Baker said: "We don’t comment on conversations with specific banks. However, as part of the Financial Stability Plan announced two weeks ago, financial institutions can apply to convert their existing preferred stock into a new convertible preferred stock, which can be exchanged into common equity shares at the option of the company as needed to strengthen their capital structure. We are open to considering a request to do so if the institution and it’s regulator believe it would promote the long term stability of that institution, and if we believe it’s in the best interest of long term stability of our economy and financial system."