In a decree published in France's Official Journal, the government authorised the sale and said the flotation should be ready towards the end of June, after clearance from state regulators.
In an effort to underwrite the bank's stability, the government will keep a 10 per cent stake in the bank and set up a group of core shareholders.
The core group will pledge to retain their stakes for a specified length of time. They will each be able to own up to 10 per cent of the bank, although together they will hold less than a blocking minority of the shares.
This avoids a straight auction, which could have seen Credit Lyonnais swallowed up by either a French of foreign group, analysts said.
"This ensures Credit Lyonnais' independence, at least at the outset, and will allow it to live on, something that was not so sure a couple of months or years ago," one analyst said.
Several rival banks, including Credit Acricole, the big co-operative bank, have already expressed interest in becoming core shareholders.
Allianz, the German insurance giant, and Axa, its French rival, have also expressed an interest.
The privatisation comes at a turbulent time for the French banking industry, currently embroiled in the merger of Paribas and Societe Generale, and a hostile bid for both of them from Banque Nationale de Paris.
Before making its hostile bid, BNP first sought to forge a "partnership of equals" with Credit Lyonnais. Its hostile bid was reportedly prompted by the government's refusal to change its plans.
Jean Peyrelevade, head of Credit Lyonnais, held talks with Michel Pebereau, the head of BNP, about a possible merger. But a tie-up would have entailed numerous branch closures where BNP and Lyonnais share a high street - a politically difficult task in France. Mr Peyrelevade rejected the proposals.
Daniel Bouton, head of Paribas, yesterday attacked BNP's $38bn (pounds 24bn) bid in an interview with the French newspaper Journal du Dimanche.
He warned the deal would lead to massive job losses as BNP sold parts of the business to foreign rivals. He added he would use "all possible solutions" to thwart the bid.
The privatisation of Credit Lyonnais, a one-time national champion, was insisted on by the European Commission as a condition of allowing France to arrange a bail-out package.
The French government spent billions of francs reconstructing Credit Lyonnais after it built up a huge volume of bad debts in the 1980s.
The near collapse followed a period of reckless lending which included the acquisition of MGM, the Hollywood studio. The debts were built up as part of an ambitious expansion encouraged by the then president, Francois Mitterand, who dreamt of Credit Lyonnais becoming the largest bank in Europe.