Taxpayers will take a 57.9 per cent stake in Royal Bank of Scotland after investors snubbed its £15bn share offer, the bank said today.
The bank's existing shareholders refused to buy the new stock because RBS's shares were trading below the 65.5p offer price announced in October.
The Government will step in to buy up the unwanted shares and shore up the bank's ailing finances - leaving taxpayers with a paper loss of almost £2.5bn.
RBS said just 0.24 per cent of the new shares had been taken up by investors - leaving the public to foot the bill for the remainder.
Alongside this £15bn outlay, the Treasury is pumping in £5bn in return for preference shares, which come with special conditions such as a ban on dividends.
RBS chief executive Stephen Hester said the bank was "grateful" to the Government for its support.
"We regret that existing shareholders did not take up their pre-emptive rights but understand that market sentiment toward the banking sector made this uneconomic in the short term," he added.
Mr Hester said his focus would be on rebuilding the business after a tumultuous period in which the bank was brought to its knees by the credit crunch.
In August the company unveiled its first loss in 40 years as a public company after suffering writedowns of £5.9bn as it reported statutory pre-tax losses of £692m for the first half of 2008.
"We must put the past behind us and move forward with a clear focus on what we need to do next. We will focus on rebuilding RBS on its powerful customer franchises globally and, in time, deliver the economic returns that all our shareholders expect and deserve," Mr Hester said.
RBS is receiving the biggest injection of public funds under the Government's £37bn bail-out package announced in October.
The Treasury is also pumping a total of £17bn into merging banks Halifax Bank of Scotland and Lloyds TSB, which could leave it with a stake of more than 40 per cent in the combined entity.