DJ – After weeks of wrestling with its regulators and the Treasury Department, Citigroup Inc. (C) succeeded in its argument that it needs to exit the Troubled Asset Relief Program, but the conditions show that regulators continue to be worried about the health of the financial giant.

Meanwhile, the U.S. government plans to sell its 34% stake in the bank within the next year.

Shares fell 3% premarket to $3.83.

Unlike any other banks that have repaid the aid so far, Citi has to replace the $20 billion of TARP funds that remained on its balance sheet entirely with fresh capital. The government and banking regulators demonstrated that, at least for now, they decide the conditions for TARP exit on a case-by-case basis, and are willing to set tough conditions.

Citi, however, will feel liberated. It can demonstrate publicly what is has been building on behind the scenes: A large global bank whose growth and expansion will be largely overseas rather than in the United States.

Citi will sell at least $17 billion in stock, with the potential of up to $2.55 billion more, and sell $3.5 billion of so-called equity units to repurchase the $20 billion in trust preferred securities held by the government.

The $20 billion repayment will result in an approximate $8 billion pre-tax loss for the bank. Citi also will end the $301 billion loss-sharing agreement with the government and cancel $1.8 billion of the $7.1 billion in trust-preferred securities it had originally issued to Washington as consideration for the benefits of the agreement, which will result in a $2.1 billion pre-tax loss.

The U.S. Treasury will concurrently sell up to $5 billion of the common stock it holds in a secondary offering, and the government will sell the remainder of its shares “in an orderly fashion” over the next six months to a year.

“We owe the American taxpayers a debt of gratitude and recognize our obligation to support the economic recovery through lending and assistance to homeowners and other borrowers in need,” said Chairman and Chief Executive Vikram Pandit.

Citi said that by Dec. 31, it will have paid or accrued $3.1 billion in dividends and interest to the government on TARP investment.

The bank also said that in January it will issue $1.7 billion of common stock equivalents to employees “in lieu of cash they would have otherwise received.”

It wasn’t all that long ago that Citi was facing humiliating talk of nationalization and its share price swooned to 97 cents in March from a record $55 in 2006. The unraveling of Citi’s shares began as the bank suffered writedowns of more than $30 billion two years ago from risky mortgage bets, forcing the ouster of CEO Chuck Prince.

The government engineered a multi-step bailout, including two cash infusions last year that injected $45 billion into Citi. The government this year agreed to convert $25 billion of TARP preferred shares into common stock, giving the U.S. a one-third stake in the company.

Citigroup also has remodeled itself to help fortify itself against losses. In January, the bank reorganized itself into two separate units – placing retail and investment banking into a revived Citicorp name, and its brokerage and asset management operations into Citi Holdings.

-By Nathan Becker, Dow Jones Newswires; 212-416-2855; nathan.becker@dowjones.com;

(Matthias Rieker and Joe Bel Bruno contributed to this story)

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