The Co-op Bank has agreed a £700m ($898m) rescue deal with US hedge fund investors that it said will see it "thrive" as a stand-alone business.

The deal will see a clutch of American hedge funds – including Silver Point Capital and Golden Tree Asset Management ­– inject cash into the struggling bank that serves four million customers.

But the agreement will see the former parent of the 150-year-old ethical lender, the Co-op Group, drop to just a 1% stake in the business.

The rescue comes after the bank put itself up for sale in February after revealing a £1.5bn black hole in its balance sheet four years ago, from which it is still trying to recover.

Co-op Bank chairman Dennis Holt said: "The board is pleased to confirm this proposal for a recapitalisation which will mean that The Co-operative Bank can continue as a viable stand-alone entity, with values and ethics at its heart."

Co-op Group, which owns a range of businesses that cover funeral parlours and supermarkets, has seen its complete control of the lender drop to a 20% stake when the bank sought outside funds a few years ago, will now see it fall to a 1% holding.

However, the Co-op Group said it "welcomes" the deal which it said provided a future for the bank and secure pensions for current and former staff.

"The group confirms that it is supportive of the plan and intends to vote in favour of the capital raising," it added.

The bank added that the Bank of England's Prudential Regulation Authority supported the rescue plan.

The lender said: "The board believes that the proposal will enable the bank to thrive as a stand-alone entity". It said it will retain its name and ethical policy as part of the deal.

Co-op bank reported an annual loss of £477m in May, bringing its cumulative losses over the last five years to more than £2.7bn.

Since failing the Bank of England's stress test in 2014, Co-op Bank has been closely watched by regulators while it tries to restore its capital to an acceptable level.

The Co-op Bank's package is the third time an ailing European lender has been rescued in the past month, after regulators orchestrated deals for Spain's Banco Popular and two lenders in Italy's Veneto region to be restructured and sold to bigger rivals.