UPDATE 4-U.S., Citi seal conversion deal, raising govt stake

* Government to convert up to $25 bln of preferred shares

* U.S. stake in Citigroup could rise to 36 percent

* Citi says private investors will also participate

* Most of Citi board will go

* Share price slumps 19 percent. U.S. futures fall

(Recasts with confirmation of share exchange deal)

By David Lawder

WASHINGTON, Feb 27 (Reuters) - The U.S. government committed to holding up to 36 percent of Citigroup's (C.N) common shares in a deal to bolster the fallen financial giant's capital base, and gave most of the bank's board their marching orders.

The U.S. Treasury agreed to convert up to $25 billion in government-held preferred shares in the bank to common equity, provided private investors contribute an identical sum, in the third major aid package for Citigroup since mid-October.

The transaction, which will not increase the government's investment in the bank, sent Citigroup's share price sharply lower in premarket trade on Friday and sent U.S. index futures to session lows.

Citigroup said that, based on full conversion, the government would hold around 36 percent of its common shares.

Major investors including Government Investment Corp of Singapore had agreed to participate in the exchange, the bank said, adding that it would take a fourth quarter goodwill writedown of $9.6 billion. [ID:nSGC001040]

It would offer to exchange common stock for up to $27.5 billion of its preferred stock, carrying an annual coupon of 8 percent and a conversion price of $3.25 per share, and would suspend dividend payments on both classes of share.

The board unanimously decided on a reshuffle that would leave independent directors in the majority and hoped to announce new appointees as soon as possible, the bank said.

By 1230 GMT, Citibank shares had slumped 19 percent in premarket trade. Europe's banking sector .SX7P extended losses to 4.3 percent after the news.

U.S. index futures hit session lows, hit by the news and the upcoming release of economic data, which could show the U.S. economy contracted by more than initially reported in the fourth quarter. [ID:nN27323505]