US banking regulators said that the Government was ready to provide more cash to keep banks afloat, as Citigroup negotiated with the Treasury over taking a larger stake in the troubled bank.

In a statement issued by the Treasury today, the regulators said that the Government would ensure that banks had the necessary capital and liquity to continue lending.

"Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments," the statement read.

The regulators did not refer to any bank by name. Shares in Citigroup plunged to an 18-year low on Friday on fears that the bank was on the verge of being taken into state ownership.

The Wall Street Journal (WSJ) reported last night that the Government was considering taking stake of up to 40 per cent in Citigroup. The talks were reportedly opened by the bank as it prepared to begin a series of stress tests on February 25.

The tests, to be taken by all America's largest banks, were set by the White House to ascertain which banks most needed taxpayer assistance.

In their statement this morning, the banking regulators said that this assistance would be in the form of preference shares but added that the shares could be changed into common stock if needed.

In a letter to the bank's 32,000 staff, Vikram Pandit, the Citigroup chief executive, did not specifically rule out another taxpayer bailout.

"As we continue to navigate these unprecedented times I want to reasssure you that I remain very confident in Citi's prospects and business position around the world," Mr Pandit wrote. "Our Tier 1 capital base is very strong and is one of the strongest in the financial services industry."

Citigroup was once the world's biggest financial group but is now number five in America after making catastrophic bad loans and losing bets on the credit market.

According to the WSJ, which cited sources close to the discussions, the Government could convert some of the $45 billion (£31billion) in preference shares it holds in Citigroup to common stock.

These preference shares, handed by the bank to the Government in return for $45 billion of taxpayer-provided capital, would convert to a 7.8 per cent stake in the bank. It was unclear what method the Government would use to increase this to a larger stake.

Such a conversion would cost taxpayers nothing more but would dilute existing Citigroup shareholders.

The talks may peter out without an increased stake being agreed, the WSJ said.

Shares in the bank were up more than 21 per cent at $2.36 each at 9.25am, as investors showed their relief that a total nationalisation did not appear to be on the cards.

Citigroup reportedly hopes to persuade private investors including the Kuwait Investment Authority also to change their preference shares into ordinary shares, to help bolster the bank's capital base.

Citigroup's capital is key because this week US banking regulators will start stress-testing America's biggest banks as part of the White House's latest bailout plan.

Mr Pandit and the board spent Sunday discussing how to increase the bank's financial strength in preparation for the tests.

President Barack Obama has so far avoided putting the Government in control of the banks and it is not known whether Mr Pandit's job is in danger, particularly given the lack of strong candidates to replace him.

On Friday Christopher Dodd, the Democrat chairman of the Senate banking committee, said that nationalisation of some banks, at least for a short time, may be inevitable to sort out the problems in America's financial system.

His comments helped shares in Citigroup and Bank of America to plummet on Friday, with Citigroup dropping below $2 per share. Bank of America reiterated on Sunday that it was not in danger of being taken into state control.

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