Royal Bank of Scotland get a further £25.5 billion from the government - all at once, instead of in stages, as announced in February.

The bailed-out bank will also sell assets to comply with conditions for state aid and the government's stake will rise from 70 per cent to 84 per cent.

The government also granted tax changes worth up to £11 billion to RBS, and it will spend £5.7 billion to buy its share of the new Lloyds shares.

And, the Treasury set aside a further £8 billion to support RBS if its position deteriorates badly.

The moves will further stabilise the banks, reduce risks to taxpayers, and increase competition, the government said. Britain took stakes in the banks as part of earlier bailouts.

Treasury chief, Alistair Darling, said the latest deal reduced the Treasury's potential insurance liabilities by more than £300 billion.

The government is also collecting a £2.5 billion fee from Lloyds for the benefit of being a potential subscriber to the insurance programme.

Market reaction

Both banks agreed to curbs on bonuses.

Market reaction for Lloyds was positive at first, but toward midday, shares were fractionally lower at 88.89 pence, on the London Stock Exchange; RBS fell seven per cent at 35.94 pence, the lowest level since July 9.

"The news is potentially good for both UK consumers and rival banking groups, although more debatable for both Lloyds and RBS shareholders," said Keith Bowman, analyst at Hargreaves Lansdown Stockbrokers.

"UK consumers will, in theory, enjoy increased choice and lower pricing, while rivals such as HSBC will be glad to see their rivals paying for their mistakes."

Lloyds said it would seek to raise a record £13.5 billion through a rights issue, surpassing the £12.5 billion raised in March by HSBC and the £12.3 billion raised by RBS in mid-2008, the two previous records.

Lloyds said it would also raise at least £7.5 billion from an exchange of debt.

Government insurance

Lloyds, which was also bailed out by taxpayers at the height of the financial crisis, said it would not be subscribing to a government insurance programme against losses on toxic assets - a move that will keep the public's stake in the bank at 43.4 per cent after the government takes its part of the rights issue.

Elsewhere, Lloyds said it had a "good revenue performance" in the third quarter and had pared costs by two per cent so far, this year. However, it still expects a full-year loss.

Lloyds' problems stem from its hastily consummated rescue-takeover of Halifax/Bank of Scotland in January.

RBS will sell its branch network in England and Wales and NatWest branches in Scotland, and also dispose of RBS Insurance, Global Merchant Services and its stake in RBS Sempra Commodities within four years to meet European Union conditions for receiving state aid.

Lloyds said it would dispose of its TSB branch, Scottish TSB branches and some other TSB branches in England and Wales. It will also sell the branches, savings accounts and branch-based mortgages of its Cheltenham & Gloucester unit.

Both banks have agreed not to pay discretionary bonuses for 2009 performance to any employee who earns more than £39,000 per year, and members of both boards agreed to defer all bonuses for 2009 until 2012, the Treasury said.

RBS agreed to absorb the first £60 billion of losses covered by the insurance programme, compared to the earlier plan to absorb £42 billion in losses. The value of the assets to be insured has been reduced from £325 billion to £282 billion.

- AP