NEW YORK (Dow Jones)–The Qatar Investment Authority has been interested in buying Citigroup Inc. (C) stock from the U.S. Treasury Department, according to a person familiar with the matter in the Persian Gulf, and a person in the banking industry.

Discussions about a potential purchase started months ago, and are, according to one of these people, ongoing. QIA’s interest was reported by the Financial Times earlier Wednesday.

Treasury, meanwhile, announced Wednesday it sold 1.5 billion Citi shares it received as a result of government aid given to the bank in the financial crisis. After the sale, it holds 6.2 billion Citi shares, about 22% of the stock, which it plans to continue to sell in open-market transactions.

Citi’s shares rose 2.1% Wednesday, to $3.86.

The QIA’s interest in Citigroup’s stock may not result in any purchase of the shares. Still, its interest illustrates that, despite the pummeling its shares took in the financial crisis, Citi’s relationship with Middle Eastern investors remains intact.

A QIA representative didn’t respond to a request for comment; a Citi spokesman declined to comment about a potential investment by QIA.

A Treasury spokesman said Wednesday, “We have given discretionary authority to Morgan Stanley to sell our shares at the market pursuant to a written trading plan. We are not involved in soliciting or approving orders.”

Customarily, a block sale would be negotiated at a discount to the market value of Citi’s stock, a source said. But any discount is a tricky, if not impossible, proposition for the Treasury, which wants to maximize the value of its Citi stake in the interest of U.S. taxpayers. Selling stock into the open market is politically the safest way of disposing of the stake for the Treasury, because any sale of Citi stock by the Treasury will likely increase the value of Citi’s shares as investors cheer the government’s exit, and the Treasury might come under criticism if it sold at a discount.

Treasury made about $1.32 billion from selling Citi stock, it said, or about 88 cents per share. The sale was made at an average share price of $4.13; it had gotten the shares at $3.25.

A Citi spokesman said, “We are pleased the Treasury is making significant progress in profitably selling its common shares in Citi.”

At least one large Middle Eastern investor has taken losses on its Citi stake. The Abu Dhabi Investment Authority has sought arbitration over its November 2007 investment of $7.5 billion in mandatory convertible notes which could lead to billions in losses. Citi said it believes the allegations are entirely without merit. A spokesman for ADIA declined to comment.

Some other Middle Eastern investors were more fortunate in their Citi investments. In January 2008, the Kuwait Investment Authority was one of several investors in a $12.5 billion capital raise by Citi. Late last year, Kuwait said it sold its entire Citi stake for a $1.1 billion profit, or a 36.7% return on its initial $3 billion investment. [The Government of Singapore Investment Corporation Pte Ltd. also did well with its investment.] And Prince Alwaleed Bin Talal, Citi’s biggest individual shareholder, has owned shares since the 1980s.

Citi Chief Executive Vikram Pandit and other senior executives have been to the Middle East to reassure investors. Prince Alwaleed, one of the bank’s most important supporters through this and previous crises, said last month the bank “has demonstrated its ability to overcome the recent economic obstacles.” In January, he sounded a more critical note when he told Fox Business Network that 2010 was the year Pandit had “to deliver” results at Citi.

Sheikh Hamad bin Jassem Al Thani, Qatar’s Prime Minister, told Dow Jones Newswires in an interview in January 2008 that QIA, the emirate’s sovereign wealth fund, would invest up to $15 billion in “blue-chip” European and U.S. banks. “We see an opportunity in U.S. banks” said the sheikh, who is also chief executive of the QIA.

Now QIA’s interest underlines how attractive Citi’s stock has become for certain private investors. Last year, hedge funds took notice of Citi’s battered stock–and judged its prospects for recovery to be good. Several, including Paulson & Co Inc., made big investments. Other institutional investors, namely mutual funds, appear to be holding back until the Treasury has sold its stake.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

(Andrew Critchlow, Chip Cummins, Randall Smith, and Maxwell Murphy contributed to this article.)

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