By Margot Patrick and Max Colchester 

LONDON--The U.K. government on Tuesday said it is selling a 7.5% stake currently worth around GBP4.23 billion ($6.99 billion) in Lloyds Banking Group PLC in the latest step in the bank's return to health.

UK Financial Investments Ltd., a part of the U.K. Treasury that manages the stake, said it will place around 5.35 billion shares with institutional investors, taking the government's stake down to around 25% from 33% currently. The government cut what had been a 39% stake in September by selling a 6% stake in the bank for GBP3.21 billion. Lloyds shares closed Tuesday at 79 pence, up around one pence on the day.

The sale price for the shares will be set after gauging investor interest Tuesday. The final price and other details of the placing are expected to be announced early Wednesday. The stock sold in September was placed at 75 pence a share, a 3% discount to its trading place then, indicating a possible placing price of 76.6 pence for Tuesday's offer.

Bank of AmericaMerrill Lynch, J.P. Morgan Securities PLC, Morgan Stanley Securities Limited and UBS Ltd have been appointed to act as bookrunners in connection with the placing.

The latest share sale had been flagged by bankers as likely to come by April, after Lloyds posted a surge in underlying profits for 2013, and said it planned to resume dividends for the first time since the financial crisis on its second-half earnings. An offer to retail investors is likely to come around September, people familiar with the matter have said.

Lloyds Banking Group Chief Executive António Horta-Osório said he is pleased taxpayers will get more of their money back through the sale.

"I believe this reflects the hard work undertaken over the last three years to make Lloyds a safe and profitable bank that is focused on helping Britain prosper," he said.

A Treasury spokesman said Chancellor George Osborne decided to sell the shares after UKFI said it "would be appropriate."

"Building a stronger banking system is a core part of the government's long term economic plan to deliver greater economic security," the Treasury spokesman said.

Lloyds received GBP19.9 billion in state aid between 2008 and 2009 to withstand the financial crisis. Since then, it has sharply cut its assets, pulled out of around 20 countries and restructured its business to focus on retail banking and business lending within the U.K.

The September share placing was a hit with investors. Bankers working on that deal said the order book was covered in an hour and that 10 orders came in for more than $250 million in shares. Shortly after the new deal's announcement Tuesday, people working on it said the order book was filling up and that some large global investors had already registered their interest in recent months about participating in this stage of the government selldown.

Razak Musah Baba contributed to this article.

Write to Margot Patrick at margot.patrick@wsj.com and Max Colchester at max.colchester@wsj.com

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