Belgium and France will pay €5.5 billion to take almost full control of Dexia in the hope this third bailout will be the last for the bank that was once the world's largest municipal lender.
The capital injection is the third attempt by Belgium and France to shore up the lender and end its troubles.
It absorbed €6.4 billion in 2008 and was pulled apart last year.
Dexia, which at its peak had business across Europe and a large US empire, had relied on long-term lending serviced with short-term borrowing, which dried up in the financial crisis.
The governments announced the move shortly before Dexia released third-quarter earnings showing a net loss for the first nine months of €2.39 billion, hit by writedowns related to asset sales. It lost €11.6 billion last year.
Belgian Finance Minister Steven Vanackere said it should be the group's last recapitalisation, but added: "Is it a total guarantee? People who give such a guarantee are unwise."
The money put into Dexia, classified as an investment rather than a cost, should not inflate Belgium's or France's deficits.
However, it will add to sovereign debt at a time of intense scrutiny of euro zone budgets. Belgium's national debt is already near 100% of annual economic output.
Belgium will sign over €2.92 billion, or 53% of the total capital, with France providing the remaining €2.59 billion, the Belgian and French ministries said.
In return they receive preference shares with voting rights, increasing their interest in Dexia to between 93% and 94%, Chief Executive Karel De Boeck told a news conference.
The group is currently majority-owned by public entities, although France and Belgium each own only 5.7% directly.
The bank has a total exposure of about €89 billion to France, €38 billion to Italy, €24 billion to Spain and €35 billion to the United States and Canada.
It has agreed to sell off most of its French arm for a nominal €1. Dexia would be relieved of having to guarantee loans to French local authorities.
It says 88% of its bond and loan portfolio is investment grade and nothing should be called toxic. Defaults had so far been marginal, it said. "Dexia is not a bad bank, but a bank that does not have funding," De Boeck said.
The plan needs approval from Dexia shareholders next month and the European Commission.
Dexia submitted a restructuring plan to the Commission in March, which envisages it pared down to a holding of bonds and outstanding loans, propped up by state guarantees.
