WASHINGTON/NEW YORK (Reuters) - The US Treasury said yesterday it was launching its plan to sell off its 7.7 billion share stake in Citigroup "in an orderly fashion", another step in the withdrawal of the government as a major stakeholder in the company.

The Treasury said in a statement it had given Morgan Stanley , its sales agent, discretionary authority to sell up to 1.5 billion common shares under certain parameters set out in a pre-arranged written trading plan.

The Treasury said it expected to provide Morgan Stanley with the authority to sell more shares after the initial amount.

The US government owns 27 percent of the bank's shares, a stake it acquired through $45 billion in bailouts to strengthen the bank's capital base in 2008 and 2009. Citi has paid back $20 billion in preferred shares, but another $25 billion was converted to common stock last year.

Shares of Citi fell 3.29 percent to $4.70 in morning trading. If the shares are sold around that price, the Treasury could still make a profit of some $12 billion on its Citi common stock holdings, as it acquired the shares at a conversion price of $3.25 each.

But Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette, said that there was about a 20.7 percent possibility that the shares could dip below that break-even price of $3.25 by mid-December.

"The quicker the Treasury really gets this sale on, the better the chance that they'll exit with a profit. But they should expect on average there to be seven or eight days that the stock will be below $3.25," he said.

Citigroup said in a regulatory filing yesterday that the sales would be made through "ordinary brokers' transactions, in block transactions or as otherwise agreed" with the Treasury. The Treasury can also make a separate agreement to sell common stock shares to Morgan Stanley.

The settlement for the share sales "will occur on the third business day following the date on which any sales are made", Citigroup said in the filing. It estimated that it will pay approximately $82 million in total expenses for the offering.

The Morgan Stanley pre-set trading plan does not include the Treasury's holdings of Citigroup Trust Preferred Securities or warrants to purchase Citi common stock.

Under the Treasury's sales agreement with Morgan Stanley, the bank can earn between $23.577 million and about $134 million for selling all 7.7 billion shares. The Treasury will pay Morgan $0.003 for each Citi share sold electronically and $0.0175 for each share sold via other methods.

Citigroup said in the filing that Michael Tarpley, associate general counsel for its Capital Markets unit, would act as its legal counsel for the sale. The Treasury's legal counsel will be Simpson Thacher & Bartlett LLP. Morgan Stanley is retaining Cleary Gottlieb Steen & Hamilton LLP as legal counsel and Davis Polk & Wardwell LLP as structuring counsel.