Updated from 3:08 p.m. EDT

Citigroup's ( C) plans to undergo a reverse stock split could actually be good for the beleaguered firm's shares.

Citi said Thursday it plans to file a proxy statement with the Securities and Exchange Commission for approval to increase its number of authorized common shares and to amend its charter to allow for a reverse stock split of its common stock.

The bank also filed with the SEC for its proposed offer to issue common stock in exchange for publicly held convertible and non-convertible preferred and trust preferred securities. In a statement, Citi said it anticipates launching the public exchange offer in early April.

A ratio for the reverse split has not yet been determined, but analysts expect the move to help raise share above $5 again -- a critical level for the company.

"For Citi, they are not going to get real money in buying shares unless that stock is over $5 per share," Cassandra Toroian, the president and chief investment officer of Bell Rock Capital, writes in an email. "Mutual funds can't buy or own shares of a company under $5. So for it to really get some stability, they need real money in there. ... If they do the reverse split there is high likelihood mutual funds will be buyers again."

Sandler O'Neill & Partners analyst Jeff Harte also wrote in a note that boosting Citi's shares above $5 through a reverse split "might make it easier for institutional investors to buy the shares."

Shares of the New York-based company shot up 26% at the start of the day, before falling back into the red along with the broader market. The stock closed down 15.6% to $2.60, amid a wider selloff.

A reverse stock split reduces the number of a company's shares outstanding, but increases the value of its earnings per share. The market value of the shares remains the same. Companies often elect to do a reverse stock split in an effort to make their stock look more valuable if the share price is significantly low. Citigroup's shares dropped below $1 a share earlier this month on the fear that the government's efforts wouldn't be enough to save it from failing.

The company proposed seven possible exchange ratios, ranging from 1-for-2 to 1-for-30. It said a split could take place before June 30, 2010, according to Reuters.

Citi shares have taken a beating this year as the company's situation has gone from bad to worse. The stock is down by 54% since the beginning of the year, after falling 76% in 2008. The stock hit as low as 97 cents a share during intraday trading two weeks ago.

But shares rose threefold from the lows after CEO Vikram Pandit said the company had been profitable in the first two months of the year and was having its "best quarter to date" since the third quarter of 2007 in a memo last week.

Investors have been leery of the ailing company's capital levels and its ability to cover its losses as the financial crisis lingers and the economy worsens. In the fourth quarter, the Treasury Department has made investments totaling $45 billion into the bank through the purchase of preferred shares. Citi and Bank of America ( BAC), which also has received $45 billion from the government, are second only to AIG ( AIG), which has received more than $170 billion, in terms of government support.

Last month, Citi announced that it would enter into an agreement with the Treasury Department to convert its preferred shares into common shares to build the company's tangible common equity. The agreement is expected to increase the bank's tangible common equity ratio to as much as $81 billion from $29.7 billion at the end of the fourth quarter.

Citi is seeking to exchange about $27.5 billion in preferred shares with a commitment from the Treasury to convert up to an additional $25 billion of its preferred securities for common stock.

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