By Dan Wilchins and David Lawder

NEW YORK/WASHINGTON (Reuters) - The U.S. Treasury delayed a plan to sell its $5 billion of Citigroup Inc <C.N> shares after a stock offering by the bank attracted weak demand and priced at a much lower-than-expected $3.15 a share.

The bank sold $20 billion of stock and convertible bonds to repay funds it owes to the government so it can avoid the executive compensation restrictions that came with multiple U.S. bailouts.

But raising that capital came at a steep cost to shareholders, whose shares are worth 20 percent less than their closing level on Friday, before the bank announced its plan for repaying funds to the government.

"It's a terrific deal for Citigroup's managers, who can get paid more, and a terrible deal for shareholders. The company paid a huge price for this capital," said Sean Egan, principal at ratings agency Egan-Jones Ratings.

Citigroup was the third major U.S. bank to launch a multibillion-dollar share sale in December and the multitude of share sales likely dampened demand, analysts said.

"Buyers are in control of the process now," said Blake Howells, director of research at Becker Capital Management in Portland, Oregon.

The share sale price is less than the $3.25 price at which the government bought them earlier this year as part of an emergency rescue of the No. 3 U.S. bank, shrinking the paper value of the government's 7.7 billion shares to $24.2 billion. That stake was originally worth $25 billion and in October was worth nearly $40 billion.

Treasury "is not going to sell at a loss. That's the bottom line," a source familiar with the situation said.

The U.S. decided not to sell any shares at this time, and has agreed not to sell Citi shares for 90 days, the bank and the Treasury said. The government owns about one-third of Citigroup's shares.

The U.S. government still plans to sell its Citigroup shares within the next year, a Treasury spokesman said.

The government's decision not to sell shares was an about-face from Monday, when Citigroup said the government would sell up to $5 billion of shares alongside the bank's offering.

BETTER TO WAIT?

Given Bank of America Corp's <BAC.N> $19.3 billion share sale at the beginning of the month, and Wells Fargo & Co's $12.25 billion share sale this week, several analysts questioned the wisdom of Citigroup's completing its massive sale in December.

The bank has only generated profits this year from moves like selling stakes in major businesses and harvesting tax benefits.

Investors may have been more receptive to Citigroup's share sale after it posted a few quarters of profits from its main banking businesses, analysts said.