The Treasury said on Thursday it has earned a gross profit of about $2 billion on sales of about one-third of its common stock holdings in Citigroup Inc as the government ramps up efforts to unwind bailout programs.

The sales have cut the Treasury's stake in the bank from nearly 27 percent to about 17.6 percent. Citi shares rose briefly in morning trading, before falling about 1.33 percent to $3.71 by early afternoon. Most of the banking sector was trading down.

Citigroup investors predicted the company's stock may rally briefly over the next two weeks, as the government pauses in its sales efforts. But the general overhang on Citigroup stock will remain until the Treasury sells the rest of its stake, they said.

Pressure on Citi shares will ease when you get rid of the government ownership, which is huge, said Bill Smith, chief executive at Smith Asset Management. Until then, it's hard when you have this amount of natural pressure that's on the shares. Plus the market's trading terribly.

The government is unwinding stakes it acquired in Citi, General Motors Co , American International Group and Chrysler Group after hundreds of billions of dollars in bailouts in 2008 and 2009.

The Treasury, which owns 60.8 percent of GM stock as a result of its $50 billion bailout last year, hopes to sell about 20 percent of its holdings as part of the automaker's initial public offering. That figure could change, according to sources with knowledge of the preparations.

The AIG exit hit a setback recently when a deal to sell its Asian life insurance unit for $35.5 billion to Britain's Prudential PLC collapsed. AIG is now considering an IPO for American International Assurance to help pay back taxpayers.

The Treasury could utilize open-market sales similar to its Citi program once GM and AIA have established market values.

TREASURY'S $2 BILLION PROFIT

The Treasury said on Thursday it took in gross proceeds of about $10.5 billion from the sale of 2.6 billion Citigroup shares under a written trading plan.

The Treasury said that after selling its second tranche of common stock acquired after bailing out the banking giant, it still holds about 5.1 billion shares.

Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette, raised concerns about the Treasury's ability to fully unload its stake in Citigroup this year. He estimated a roughly 55 percent chance the Treasury would not finish selling its remaining shares by the plan's December 14 completion deadline.

They're going to either have to sell some of those shares at a loss below $3.25 per share, or they're going to have to get an extension from Citigroup, he said.

Another challenge comes from the generally slower market activity during the summer, Wilson said. It's conceivable that if the volumes pick up in the fall, they're going to pick up the pace, but we still have several summer months to go through, he said.

Treasury said sales so far in the plan administered by Morgan Stanley averaged $4.03 a share versus acquisition cost of $3.25 a share. That would produce a gross profit -- before sales costs -- of around $2 billion for the stock sold so far.

Treasury expects to continue selling shares in the market in an orderly fashion once the blackout period related to second-quarter earnings ends. The bank is expected to report results on July 16.

Under the plan, the government agreed to pay Morgan Stanley $0.003 for each share sold electronically and $0.0175 for each one sold otherwise. Costs for shares sold so far under that arrangement were $7.8 million to $45.5 million.

Citigroup received a total of $45 billion in taxpayer funds under the Treasury's $700 billion bailout program and has paid back $20 billion.

Citigroup spokesman Stephen Cohen said the company was pleased that Treasury has profitably sold a third of its common shares.

(Reporting by David Lawder and Maria Aspan; editing by Chizu Nomiyama, Jeffrey Benkoe, Andrew Hay)

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