Citigroup Inc shares fell sharply on Thursday, a day after the bank's $20 billion stock and bond offering drew a cool reception on Wall Street and prompted the U.S. Treasury to delay plans to start selling off its Citi holdings.

The shares fell as low as $3.15, down 8.7 percent and equal to the offering price. It was the largest percentage drop in the shares in three months and the largest fall among U.S. bank stocks on Thursday.

Citi's shares recovered slightly in late morning trading but still trailed other U.S. banks: the KBW Banks Index <.BKX> was down just 0.3 percent at midday.

It's a disaster, said William Smith, chief executive officer of Smith Asset Management in New York.

The third-largest U.S. bank by assets sold $20 billion of stock and convertible bonds after the market closed on Wednesday, raising funds to repay a government bailout.

The offering priced 20 percent below Citi's $3.95 share price of last Friday, before the bank announced plans to repay the government, and almost 9 percent below $3.45, the closing price on Wednesday.

The U.S. Treasury will sell its stake in Citigroup within the next 12 months, after an initial 90-day lock-up period, said Herbert Allison, Treasury assistant secretary for financial stability, on Thursday.

The Treasury will obtain the best possible price on the shares for the American public, Allison said.

The fact the government did not sell their stake was a sign there was really limited market appetite, said Nick Kalivas, vice president of financial research & senior equity index analyst at MF Global in Chicago. Now you have this government share sale hanging over the market, he added.


Smith said Citi suffered by launching its offering after Wells Fargo & Co sold $12.25 billion in stock on Tuesday and Bank of America Corp two weeks ago sold $19.3 billion in stock. Both those banks were also seeking to repay government bailouts.

Bank of America priced its offering at about a 5 percent discount to the previous day's close, two days after announcing the deal. Wells Fargo priced its offering at just 2 percent below the previous close, a day after announcing the deal.

Citi's management team, led by Chief Executive Vikram Pandit, should have moved faster after announcing the offering Monday morning, Smith said.

Citi management can be faulted for not moving quickly, but it was a large deal and was complicated by the government's involvement on several fronts, said Gary Townsend, chief executive of Hill-Townsend Capital. There were plenty of problems with this deal, he said.

Earlier this year the government agreed to convert $25 billion of its Citi preferred stock into common stock, to further strengthen the bank's capital levels.

Citi was anxious to repay the government bailout and escape executive compensation restrictions tied to the funds.

Spreads on Citi's 6.01 percent notes due in 2015 widened by 17 basis points to 299 basis points over Treasuries.

Normally, bondholders benefit when a company raises capital, but creditors are concerned that Citigroup may not yet be able to stand on its own, said Sean Egan, principal at Egan-Jones Ratings Co in Haverford, Pennsylvania.

Citi is also facing rising losses on mortgages and consumer loans as the recession wears on. The bank announced on Thursday it would suspend foreclosing on distressed homeowners over the holiday.

The shares recovered slightly in late morning trading to $3.23, down 6.4 percent.

(Reporting by Elinor Comlay, additional reporting by Leah Schnurr and Dena Aubin; Editing by Lisa Von Ahn, John Wallace and Matthew Lewis)