British taxpayers pumped 20 billion pounds into Lloyds to rescue the bank during the financial crisis of 2007-9, leaving the government with a 41 percent shareholding.

It has now sold about half of that stake and plans to sell 9 billion pounds worth of the stock over the next year. The Conservative party said on Sunday that would include a sale to private retail investors at a discount if it wins next month's general election.

In a notification to the London Stock Exchange on Friday, Britain's finance ministry said its shareholding in the bank now stood at 20.95 percent.

UK Financial Investments (UKFI), which manages the government's stakes in bailed-out banks, hired Morgan Stanley in December to sell Lloyds shares on the stock market through a "pre-arranged trading plan".

Under the arrangement, Morgan Stanley was handed full control of selling shares in Lloyds, on the condition that the shares were not sold below the average price of 73.6 pence that the government paid for them. At 0830 GMT, Lloyds shares were down 0.4 percent at 78.72 pence.

The process effectively removed the threat of political interference in the sale process in the run-up to the election.

However, the success of the plan will be seen as positive for the Conservative party, which has said the sales vindicate its economic policies while leading a coalition government with the Liberal Democrats since 2010.

The sales so far by Morgan Stanley have reduced the government's stake down from 24.9 percent when the plan was launched and taken the total amount raised by the government since it started reducing its stake in September 2013 to around 9.5 billion pounds.

"Today's announcement shows the further progress made in returning Lloyds Banking Group to full private ownership and enabling the taxpayer to get their money back," Lloyds said in a statement.

"This reflects the hard work undertaken over the last four years to transform the group into a simple, low-risk and customer-focused bank that is committed to helping Britain prosper."

Lloyds has said it will support plans for a future sale to retail investors. The bank made preparations for a sale of shares to retail investors last year before the government scrapped the plan following a decline in the bank's share price.

(Additional reporting by Sinead Cruise; Editing by Mark Potter)

By Matt Scuffham