The deal begins to dissolve what has been a troubled relationship between Citigroup and the government, which bailed out the bank with three rescues last year and this year but also pressured it to sell businesses and remove executives.
The government plans to start selling the roughly $30 billion of Citigroup shares it owns, and is ending its agreement to guarantee a roughly $250 billion pool of Citigroup assets against outsized losses.
The government estimates it could see a profit of $13 billion to $14 billion on its investment in the bank.
The Treasury said it was pleased Citigroup was moving forward with the plans.
While much work lies ahead to improve lending and spur job creation, today's announcement by Citigroup takes us another step in the right direction, the Treasury Department said in a statement.
Citigroup has long been seen as one of the weakest of the large financial institutions to receive bailout money, and its repaying the government may be a sign of broader economic recovery.
The government wouldn't allow any public movement in this direction without acknowledging that things are getting better, said Mike Holland, founder of money management firm Holland & Co in New York.
The government's multiple bailouts of Citigroup left the United States with extraordinary say over the bank's operations. Regulators pressured the bank to sell businesses and replace senior executives.
The bailouts also gave the Obama administration's pay czar, Kenneth Feinberg, say over the pay of the bank's top 100 employees. That oversight will end when the bank repays the $20 billion of Citi trust preferred securities that the United States still owns, and ends the guarantee on the pool of assets.
But analysts cautioned that like other banks repaying the government, Citigroup is still subject to U.S. regulation -- and pressure.
They're still in the government's embrace. It's just not a bear hug now, said Anton Schutz, president of Mendon Capital Advisors, which owns Citigroup shares.
Citigroup's exit from the Troubled Asset Relief Program, which follows a similar move by Bank of America Corp
Citigroup shares were down 15 cents at $3.80 in trading before the market opened.
The bank's shares have fallen about 40 percent this year, compared with a decline of about 1.6 percent for the banking industry as measured by the KBW Banks index <.BKX>.
Citigroup Chairman Dick Parsons will join executives from other top-tier banks, including Goldman Sachs
Obama is expected to call on the bankers to take responsibility for helping the economy after benefiting from taxpayer-funded bailouts.
As part of the deal with Citigroup, the U.S. Treasury will sell up to $5 billion of Citigroup stock it holds, alongside the bank's $17 billion stock offering. The bank's offering may swell to $19.55 billion if investor demand is high enough.
Bank of America, which sold $19.3 billion of shares earlier this month to exit TARP, found extremely strong demand for its offering. Investors told Reuters they received about half the shares they ordered in that deal, signaling the bank could have sold twice as many shares as it did.
Citigroup's capital raising this week also includes the sale of $3.5 billion of tangible equity units, which have characteristics of both debt and equity.
In January, Citigroup will issue $1.7 billion of common stock equivalents to employees in place of cash they would have otherwise received.
When the transactions are done, the bank will be left with a Tier 1 common ratio of 9 percent, putting it above Bank of America's 8.4 percent and JPMorgan's 8.2 percent, according to a Citigroup presentation to investors.
The bank also said it might issue up to $3 billion of trust preferred securities in the first quarter of 2010.
Citigroup borrowed $45 billion last year under TARP. This year, the government agreed to convert $25 billion of those funds into Citigroup common stock, leaving the United States with a roughly 34 percent stake in the bank. That stake is now worth nearly $30 billion.
(Reporting by Dan Wilchins; Additional reporting by Christopher Kaufman and Elinor Comlay; Editing by John Wallace)