The increased provision to compensate customers of Lloyds, Halifax and Bank of Scotland reflected a greater number of successful complaints, the bank said.
Lloyds, which is one-third state owned, has already spent more than £8bn compensating victims of PPI mis-selling, by far the largest provision made by any British bank. It said its PPI costs now total a potential £9.825bn out of a £20bn bill for the whole UK banking sector.
News of the new provisions emerged a week after state-controlled Royal Bank of Scotland was forced to set aside £3bn to cover penalties for financial misconduct, including the mis-selling of PPI.
Marc Gander, founder of the Consumer Action Group, said that for Lloyds to describe their PPI repayment fund as a "cost" was "really mocking their victims". He added: "They are simply having to repay what they have taken. Since when has that been a cost?
"No one should shed tears for the bank. While they have had other people's money, they have been lending it out at up to 25% interest and more, so even though they are having to pay it back with 8%, they are still quids in. It has been a nice earner and there has been no disincentive to do it again."
Barclays, another of the UK's big four banks, said last week that it would take £330m in fresh provisions for legal and regulatory issues that will affect fourth- quarter profits.
The PPI woes for Lloyds came a week after it suffered an IT failure affecting debit cards and cash machines and enraged the UK Government with plans to cut 600 of its 2700 advisers to small and medium enterprises.
George Culmer, finance director, admitted that predicting the cost of PPI was "fiendishly hard".
He said Lloyds had so far received 2.5 million complaints from affected customers and was expecting a further 500,000. "I'm as disappointed as anyone at getting it wrong again," he said. "I don't expect to put any more on top of this, but the risks remain."
Lloyds also said it had put aside an extra £130m to compensate small and medium-sized businesses who were mis-sold interest rate hedging products, taking the total cost to £530m.
But it also said underlying profits for 2013 would be £6.2bn, nearly double what analysts expected.
The PPI issues have hampered the efforts of Antonio Horta-Osorio, Lloyds chief executive, to return the bank to private ownership.
Lloyds received a £20bn taxpayer bail-out in 2009 following a disastrous takeover of HBOS in 2008. That cost an average of 63.1p a share.
The Treasury sold a 6% stake to institutions last September at 75p a share, raising £3.2bn.
The taxpayer still owns 23.3bn shares in Lloyds, worth £18.9bn at yesterday's price.
In December the Financial Conduct Authority hit Lloyds with a record £28m fine for putting staff under intense pressure to sell products customers did not want. Workers were told they would face demotion and pay cuts.