AIB will be required to raise a further €6.1bn of core Tier 1 capital before the end of February to get its capital ratio up to 14 per cent, under the terms of Ireland's bailout from the European Union and the IMF.
AIB, a former stock market darling, will have to cancel its listing on the main Irish and British stock markets and will apply instead for a listing on the enterprise securities market of the Irish exchange to give shareholders access to a trading facility for their stock.
"This capital is essential to allow AIB to fulfil its role in supporting the Irish economy," Finance Minister Brian Lenihan said in a statement.
AIB's aggressive courtship of property developers proved its undoing when Ireland's real estate market bubble burst, triggering huge industry-wide losses that forced the government to seek an €85bn bailout from the EU and the IMF.
Shares in Allied Irish Banks dropped 19 per cent to 32 euro cents following the announcement. The stock hit a peak of more than €24 in 2007, when Ireland's property boom was at its height.
The government is using funds from the National Pension Reserve Fund (NPRF) to bulk up AIB's core Tier 1 capital ratio, a key measure of financial strength, to eight per cent ahead of a year-end deadline set by the central bank.
In return, the NPRF will get ordinary shares boosting its current 19 per cent stake in the bank to nearly 50 per cent.
The NPRF will also get convertible non-voting shares which will be converted into ordinary stock, giving it a near 93 per cent holding, once AIB completes the sale of its Polish interests to Spain's Santander.
AIB has sold off prized overseas assets to strengthen its balance sheet but spiralling loan losses kept raising its additional capital requirements from €7.4bn in March to €10.4bn in September to €15.7bn in November when Ireland agreed to "overcapitalise" its banks in return for EU/IMF assistance.