The Treasury Department announced on Friday it will convert some of the preferred stock it holds in struggling Citigroup into common stock, a step that will give it a significant stake in the bank.

It said that up to $25 billion of preferred stock that the U.S. government holds will be converted to common stock. Citigroup said that meant the U.S. government could come to own as much as 36 percent of its common stock.

The U.S. government currently holds about $45 billion of Citigroup's preferred stock purchased through two separate capital injections last year.

The share conversion transaction does not involve pumping more government cash into the bank.

Treasury said that Citigroup was replacing the majority of its board of directors as soon as possible. Chief Executive Vikram Pandit is keeping his job.

Treasury said that Citigroup will still be taking part in so-called stress tests for the country's biggest banks -- those with assets of $100 billion or more in assets -- that will determine their ability to withstand future losses.

(Reporting by Glenn Somerville; Editing by Theodore d'Afflisio)