Barclays will issue £5.8bn in new shares as part of a move to plug a £12.8bn capital shortfall created by new regulatory demands.
The bank will also issue £2bn of bonds that are turned into shares or wiped out if the bank gets into trouble.
The size of the share sale is much larger than analysts had expected. Barclays' stock closed nearly 6% lower.
Barclays chief executive Antony Jenkins said the plan would not reduce lending to small businesses and households.
Last month, Mr Jenkins had argued against the fresh capital requirements, warning that if Barclays had to meet this tough measure it could be forced to scale back its lending to small businesses and households.
The BBC's business editor Robert Peston said: "Barclays' chief executive, Antony Jenkins, insisted to me that the flow of credit to the real economy in the UK would not shrink."
However, he added: "It means Barclays will provide fewer financial transactions to big companies, life insurers and pension funds, inter alia, to help those giant institutions reduce their risks. And to be clear that will represent a tightening of credit for those customers, so there may be a negative economic impact."
A bold plan
"I am certain the decisive and prompt action we are taking will leave Barclays stronger," Mr Jenkins said.
The share sale will be done as a rights issue, giving existing investors the opportunity to buy new shares so their stakes will not be diluted.
The bank will also reduce the level of risky assets on its balance sheet by between £60 to £80bn.
"I think they've done the right thing. Anything else would have been a fudge, they needed to get on and raise equity," said Mike Trippitt, analyst at Numis Securities.
Tough new rules
Barclays' move comes after the banking regulator - the Prudential Regulation Authority (PRA) - issued tough new capital requirements aimed at ensuring banks are protected from the risk of investment losses, even in the event of a fresh financial crisis.
The PRA requires all banks to have a minimum leverage ratio - a measure of financial health indicating the amount of capital held by the bank relative to its gross lending - of 3%.
Under the new requirements, Barclays was found to have a capital shortfall of £12.8bn.
The Bank of England said the PRA welcomed Barclays' capital plan: "We conclude that it is a credible plan to meet a leverage ratio of 3 per cent, after adjustments, by June 2014 without cutting back on lending to the real economy."
Barclays said it would boost its dividend payout in an attempt to reward shareholders for the upheaval. The bank will bring forward its target to distribute 40-50% of earnings in dividends by a year to 2014.
"The Board and I are aware of the implications of a rights issue for shareholders. We hope to balance this with reduced uncertainty in the outlook for Barclays and with enhancement of our dividend payout from 2014," said Mr Jenkins.
Meanwhile, Barclays said adjusted second quarter pre-tax profit fell 17% in the second quarter to £3.6bn.
Mr Jenkins said performance indicated "good momentum". The £3.6bn adjusted pre-tax profit figure excludes a higher-than-expected additional £1.35bn charge for Payment Protection Insurance (PPI) mis-selling costs and £650m for interest rate hedging compensation. In total, these two issues have cost Barclays £5.5bn.
PPI was designed to cover loan repayments for policyholders who became ill, had an accident or lost their jobs.
"The eye-watering PPI compensation bill continues to escalate, showing how much banks have been in denial about the scale of their mis-selling," said Which? executive director Richard Lloyd.
"We need to see a big change in the culture of our banks to stop mis-selling scandals at source," Mr Lloyd added.
Mr Jenkins said that the bank's plans would help it in its bid to transform itself into what it calls a "Go-To" bank.
Mr Jenkins is trying to revamp the image of Britain's third-largest bank, after the aggressive culture of former Barclays boss, Bob Diamond, culminated in a £290m fine for rigging Libor rates.