Bankia, which is in the process of being taken over by larger rival Caixabank, was bailed out in a 22.4 billion euro state rescue in 2012 at the height of Spain's financial crisis.
"The purpose of this extension is to try to make the most efficient use of public resources, maximising the recovery of this aid," government spokeswoman Maria Jesus Montero said after announcing that the deadline had been put back to the end of 2023.
So far, the state has recovered only 3.3 billion euros of the bailout funds.
Despite its deal with Caixabank, shares in Bankia fell almost 24% last year as banks across Europe struggled to cope with record low interest rates and the economic downturn triggered by the COVID-19 pandemic.
The government's 61.8% stake in Bankia is expected to shrink to 16.1% after the merger with Caixabank, which is due to close by the end of the first quarter.
Tuesday's move is the third time the Spanish government has extended the self-imposed deadline to sell its Bankia stake.
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