Citigroup Inc shares were trading down around 5 percent on Tuesday after reports the government might begin shedding its stake in the New York-based bank.

Citigroup, eager to escape the burden of a significant government ownership stake, is in talks with U.S. officials about selling part of the government's 7.7 billion shares in the bank, sources familiar with the situation said.

The bank may also look to sell about $5 billion of new stock to partially repay other Citi securities owned by the government, sources said. The United States owns about $27 billion of these other securities, known as trust preferreds, which are a hybrid of stocks and bonds.

Investors have generally welcomed banks unwinding government investments made during the financial crisis, but selling a large block of shares could pressure Citigroup stock.

How the government would sell its 34 percent stake in Citigroup -- whether in dribs or drabs or large blocks-- is unclear. The timing is also uncertain. The United States will likely go ahead with a sale only when it is confident Citigroup has returned to profitability, sources said.

Citigroup spokeswoman Shannon Bell declined to comment.

Mike Holland, president of money manager Holland & Co in New York, said fears of an over-saturated market for Citi shares could be the reason why they are trading down today.

One plausible explanation could be the huge supply coming on the market, said Holland, who nonetheless welcomed the news that Citi was exploring options for exiting the bailout program.

Citigroup shares were down 23 cents, or 5 percent, at $4.29 in afternoon trading. The bank's stock was the trading session's biggest decliner on the KBW Banks index <.BKX>.

The Wall Street Journal reported that Citi contacted a U.S. Treasury official during the weekend with the message that the company wanted to begin discussions about the government shedding its stake.

The government would stand to make billions of dollars in profit from its stake in Citi, as the shares have risen more than 30 percent from the price at which the Treasury converted its preferred shares into common stock.

(Reporting by Steve Eder and Dan Wilchins; editing by Tim Dobbyn and Andre Grenon)

Citigroup Investment Down Sale