Feb. 27 (Bloomberg) -- The U.S. government ratcheted up its effort to save Citigroup Inc., agreeing to a third rescue attempt that will cut existing shareholders’ stake in the company by 74 percent. The shares fell as much as 48 percent.

The Treasury Department agreed to convert as much as $25 billion of preferred shares into  common stock as long as private holders agree to the same terms, the government said in a statement today. The U.S. doesn’t immediately intend to inject additional money after channeling $45 billion to the New York- based company last year.

“It’s just unbelievable,” said  David Rovelli, managing director of U.S. equity trading at Canaccord Adams Inc. in New York, in a Bloomberg Television interview. “The government is making up the rules as they go. A continued breakup is probably in the cards.”

Citigroup also boosted its record 2008 loss 48 percent to $27.7 billion as it took an accounting charge for the value of acquired businesses whose value fell. The bigger loss and increased government involvement complicates Chief Executive Officer Vikram Pandit’s attempt to restore confidence in the company after the stock sank to the lowest price in  18 years. The government is supporting the company because of concern its failure might roil already weak global markets.

Government Stake

Assuming the maximum amount of preferred shares eligible for conversion, the government would own about 36 percent of Citigroup’s common stock and existing stockholders would be left with a 26 percent stake. Shares of the company fell to $1.28 in New York from $2.46 at the close on the New York Stock Exchange yesterday. The stock plummeted 90 percent during the past 12 months. Only Cincinnati-based  Fifth Third Bancorp fell more of 24 companies on the  KBW Bank Index.

“This is another step toward creeping nationalization,”  Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, said in an interview on Bloomberg Radio. “This country is going through no less than an economic revolution,” said Levitt, a board member of Bloomberg LP, the parent company of Bloomberg News.

Federal Reserve Chairman  Ben S. Bernanke said Feb. 25 he wants to avoid nationalizing Citigroup and other large banks in a way that would wipe out shareholders and leave the U.S. in full control. Bernanke said the government might end up owning a “substantial minority” of the bank.

Selling Businesses

The Treasury Department is injecting a fresh round of bailout funds into the nation’s banks to help them weather the recession. Regulators on Feb. 25 announced details of “stress tests” to determine how much capital banks will need should unemployment climb to 10.3 percent in 2010.

Pandit, 52, has been selling units to free up capital. He said last month he planned to sell the bank’s CitiFinancial consumer-finance and Primerica life-insurance subsidiaries as soon as the market permits. He also struck a deal to sell majority control of the bank’s Smith Barney brokerage to  Morgan Stanley.

As part of today’s deal with the government, Citigroup also agreed to reconstitute its board so that a majority of the directors are new and independent, Treasury said today.

The CEO has said he wants to refashion the financial- services behemoth, built in the 1980s and 1990s through a chain of  acquisitions, into a global bank focused on retail branches, securities trading, investment banking and payment processing.

Dividend Cut

The government’s increasing control over the bank’s affairs grew apparent after the bank got $25 billion of bailout funds in October and another $20 billion in November. The bank also paid $7 billion of preferred stock for $301 billion of guarantees on mortgages, junk-grade loans and subprime-tainted securities.

Citigroup, which today suspended its dividend of a penny a share, has already accepted restrictions on executive pay and limited luxury perks such as office renovations and unnecessary private-jet travel. Citigroup said in a separate statement today it will eliminate dividends on preferred stock.

The bank also was pressed to participate in a foreclosure- prevention program favored by Federal Deposit Insurance Corp. Chairman  Sheila Bair. The company consented to lawmakers’ demands that it support a bill, opposed by the banking industry, that gave bankruptcy judges the authority to write down mortgage principal.

Citigroup still faces scrutiny of whether it’s appropriately using the bailout funds. Some lawmakers have criticized its $20- million-a-year sponsorship of the New York Mets’ new baseball stadium in the New York City borough of Queens. Corporate- governance advocates say the bank is paying for millions of dollars of perks, including offices, secretaries and cars and drivers, for retired executives.

Citigroup said last week director  Roberto Hernandez Ramirez will keep getting reimbursed for his use of private aircraft and other perks after he steps down from the board in April because of his continuing role as non-executive chairman of Citigroup subsidiary  Banco Nacional de Mexico. The benefits, which also include an office, secretary and personal security, cost $2.61 million in 2007, according to a March  regulatory filing.

To contact the reporters on this story:  Bradley Keoun in New York at bkeoun@bloomberg.net;  Rebecca Christie in Washington at Rchristie4@bloomberg.net