Taxpayers are set to become the biggest shareholders in the combined Lloyds TSB-Halifax Bank of Scotland "superbank".
The two banks plan to raise an extra £17 billion to boost their balance sheets and are appealing to existing shareholders for a total of £13 billion.
If - as seems likely - investors snub the new shares, the Treasury will take them up, leaving it with a potential stake of up to 43.5 per cent in the new business.
Lloyds TSB and HBOS have renegotiated the terms of the takeover in the light of the mammoth capital-raising exercise, with Lloyds paying just 0.605 of its shares for every HBOS one. This values HBOS at around £6.9 billion.
HBOS investors will own just a fifth of the overall group, with Lloyds TSB shareholders potentially holding little more than a third, or 36.5 per cent.
News of the taxpayer's potential large exposure to the struggling banking sector came as HBOS - the UK's biggest mortgage lender - chose this morning to issue a profits warning.
HBOS said market conditions had "deteriorated significantly" since the end of June as house price falls gather pace.
"Underlying profitability is therefore now being impacted by a significant deterioration in credit conditions and falling property prices with associated increased provisioning in both the retail and corporate businesses," it said.
HBOS also warned of a further round of write-downs on investments hit by the credit crunch as well as higher funding costs.
"HBOS now expects these factors to impact substantially on the management's expectations of the underlying results for 2008," it warned.