Citigroup Inc is in talks to give the U.S. government a larger stake in its business, providing Washington with a far greater say in the affairs of the ailing banking giant, Reuters reported.

Taxpayers could end up owning as much as 40 percent of Citigroup’s common stock, though executives at the third-largest U.S. bank by assets hope to limit the stake to about 25 percent, The Wall Street Journal reported today, citing people familiar with the situation.

The talks could lead to the government converting a substantial portion of its $45 billion in Citigroup preferred shares, equal to a 7.8 percent stake, into common stock, diluting the holdings of existing shareholders, the newspaper said. The government took that stake when it bailed out the bank last fall.

If the government took a large common equity stake in Citigroup, the move would stop short of a full nationalization that wipes out shareholder equity.

Meanwhile, banking regulators said they are prepared to pump additional cash into financial institutions.

In the coming weeks, the U.S. Treasury Department is expected to subject banks with more than $100 billion of assets to “stress tests” to decide which need capital. Citigroup ended 2008 with $1.95 trillion of assets.

Governments worldwide are moving to prop up ailing banks. Britain, for example, has taken a majority stake in Royal Bank of Scotland Group plc.