(Reuters) - Citigroup Inc (C.N) plans to slash the number of common shares outstanding and reintroduce a dividend after suspending payouts two years ago, taking another step in its long recovery from the brink of failure during the financial crisis.

Many of the biggest U.S. banks on Friday announced dividend hikes after the Federal Reserve completed a second round of industry stress tests.

Citi said it will shrink the number of common shares through a 1-for-10 reverse stock split and start paying a quarterly dividend of 1 cent per share in the second quarter.

The third-largest U.S. bank largely finished extricating itself from U.S. government ownership in December after taking $45 billion in bailout aid during the financial crisis.

Its reinstated dividend pales in comparison to the payouts announced by some rivals on Friday. JPMorgan Chase & Co (JPM.N), for example, will pay 25 cents per share -- a 20-cent increase -- in April.

The reverse split will reduce Citi's outstanding common shares to 2.9 billion, from about 29 billion currently. No fractional shares will be issued.

The reverse split will take effect after the close of trading on May 6.

"Citi is a fundamentally different company than it was three years ago," Pandit said in a statement. "The reverse stock split and intention to reinstate a dividend are important steps as we anticipate returning capital to shareholders starting next year."

The bank's shares were up 10 cents, or 2.2 percent, in premarket trading.

(Reporting by Joe Rauch in Charlotte and Maria Aspan in New York; editing by Gerald E. McCormick and John Wallace)

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