Lloyds controversially took over HBOS at the height of the banking crisis and it said on Wednesday that 80 per cent of the bad debts of $22.7bn had stemmed from the takeover.
"Management expects the group's results to improve in the second half and through 2010"
Eric Daniels, Lloyds chief executive
The bank said 75 per cent of the loans in difficulty were set to be included in the government's asset protection scheme which shares the burden of the losses between the taxpayer and the bank's shareholders.
The chief executive of Lloyds expressed confidence that the worst part of the bad debt burden was over and that its future earnings would improve.
Eric Daniels said: "With impairments anticipated to have peaked in the half, management expects the group's results to improve in the second half and through 2010."
The bank said that the $6.8bn loss compared with a $4.75bn profit for the same period last year.
Lloyds' losses were smaller than many analysts had predicted and the banks shares were up over 11 per cent in afternoon trading.
Banking shares have helped lead the recovery of global stock markets over recent months but speaking to Al Jazeera, Edmund Conway, economics editor at the Telegraph, a British newspaper, warned that people shoud not get carried away by the figures.
Conway said: "We shouldn't get too carried away, this is only the early stages of what might be a little bit of a recovery.
"Even though the stock market is going to rise and the wider economy might start to come back to growth soon ... at the same time unemployment is still rising.
"It is going to keep rising for a while, and that feeling of disappointment, the 'feel bad factor' is going to last for quite some time."
In common with HSBC and Barclays earlier in the week, rising profits announced on Wednesday from BNP Paribas, Unicredit and Standard Chartered raised hopes that European banks were over the worst of the financial crisis.
BNP Paribas, France's biggest bank by market value, posted a 6.6 per cent rise in net profit, while Asia-focused Standard Chartered revealed a record pre-tax result.
UniCredit, Italy's largest bank, outdid expectations with a second quarter net profit of $705m, up 10 per cent from the previous quarter.
The bank said the rise was on the back of improved trading profits which had aided its recovery from its exposure to recession-hit eastern Europe.
Standard Chartered announced a share placing worth $1.7bn which it said it would use to take advantage of opportunities in China and India as their economies recovered.