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The move had been on the cards since Osborne in June accelerated the timetable for selling RBS, after his Conservative Party won May's national election with a surprise majority, giving his party more power in government.
He has lost no time since then in pressing on with his plans for Britain's economy, including the sale of more shares in Lloyds Banking Group and a budget that included a shift away from welfare spending to higher wages for workers.
Osborne aims to sell at least three quarters of its RBS holding, currently worth about 25 billion pounds, in the next five years.
UK Financial Investments (UKFI), the body that holds the stake, said it sold 630 million shares in a quick-fire sale to institutional investors after the market closed on Monday, slightly more than it had planned to sell.
The sources said other benefits of the sale are that it increases liquidity in the stock and shows there is investor appetite, particularly in Britain and the United States, which accounted for 85 percent of demand, one source said.
More and bigger sales to institutions are likely, but UKFI could also opt for a trading plan that involves small frequent sales in the market, or a sale to retail investors.
The 2.3 percent discount to RBS's closing price on Monday, at which the shares were sold, was narrower than the 3.1 percent discount on the government's first sale of Lloyds shares in September 2013.
At 1215 GMT, RBS shares were down 0.9 percent at 334.7 pence, outperforming a weak European banking index.
Investors put in bids for 2.4 times more than the number of RBS shares sold by the government, a person familiar with the matter said.
RBS CEO Ross McEwan said he was pleased the sell-down had begun, adding it reflected the progress the bank had made "to become a stronger, simpler and fairer bank".
RBS was briefly the world's biggest bank by assets, but has more than halved its assets and the size of its investment bank and sold businesses around the world.
Britain has sold down its stake in Lloyds at a profit over the past two years and now holds less than 14 percent. The taxpayer could make at least 2 billion pounds on the Lloyds bailout, also at the height of the financial crisis.
The RBS sale was handled by Citigroup, Goldman Sachs , Morgan Stanley and UBS.
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