UK Financial Investments, which manages the taxpayer's holding in the bank, placed a 7.78% stake with investors at a price of 75.5p per share.
This represented a 4.6% discount to Tuesday's closing price but was above the average 73.6p price at which the Govenrment acquired its stake during Lloyds's 2009 bail-out.
This leaves the Treasury with a 24.9% position in Lloyds, down from 32.7%. As the City digested the news, Lloyds' shares finished the day at 75.2p, down 3.91p on the day.
Gary Greenwood, analyst at Shore Capital, said: "We expect the placing to dampen demand for the stock in the short-term, but retain our fundamentally positive stance reflecting the company's position as a geared play on a recovering UK economy."
Chancellor of the Exchequer George Osborne said yesterday's sale "represents good value for the taxpayer" and the proceeds would be used to reduce the national debt.
"It is another step in repairing the banks, in reducing our national debt and in getting the taxpayers' money back," he added.
Taxpayers are likely to make a small profit on the £20bn injected into the bank in the wake of its rescue takeover of Edinburgh- based Halifax Bank of Scotland.
Another large stake sale is expected before the autumn and the Government could succeed in engineering a complete exit before the General Election in May.
The next share sale is expected to include an offer to retail investors
Shailesh Raikundlia, analyst at Espirito Santo, said: "While the reduction in the Government's stake does reduce the overhang risk and the increased free-float will increase passive demand, there still remains c.25% of Lloyds shares to be placed over the next year."
He said that factors including an improvement in the UK economy are already factored into its share price.