Wachovia Deal Stalls on Mid-Atlantic Branch Dispute

Ongoing talks between Citigroup and Wells Fargo over Wachovia's assets have hit an obstacle, as the parties negotiate which bank will take ownership of Wachovia's branches in the Mid-Atlantic region, according to people familiar with the talks.

The Federal government is pushing Citigroup and Wells Fargo to reach an agreement and avoid a court battle over Wachovia , sources have told CNBC.

As of late Thursday, the talks centered on an arrangement between Citigroup and Wells Fargo , where Citigroup would receive between 20 percent and 25 percent of Wachovia's $440 billion in deposits. (Click the accompanying video to hear the latest on ongoing attempts to hammer out a Wachovia deal.)

Wells Fargo would receive the remainder of the firm, including the rest of Wachovia's deposits and its investment bank.

Negotiations to resolve the dispute remain fluid and could change at any time.

On Thursday, the Wall Street Journal reported that both Citigroup and Wells Fargo were surprised by the concentration of assets on Wachovia's books that they regard as low-quality.

Wachovia has been hobbled by the mortgage crisis, but has a large network of branches.

Citigroup and Wells Fargo agreed Wednesday to extend their legal standstill in their fight for Wachovia until Friday morning, giving them more time to work toward a mutual agreement.

Citigroup would like to acquire Wachovia's bank branches in the Northeast and Mid-Atlantic regions, according to senior executives at Citigroup.

On Sept. 29, Citigroup reached a preliminary agreement to buy Wachovia's banking assets for about $2.1 billion with partial government guarantees. However, a few days later, Wells Fargo said it signed an agreement to buy all of Wachovia without any government intervention. That all-stock deal was worth about $15.1 billion at the time it was announced.

After the Wells Fargo announcement the battle for Wachovia moved to both state and federal courts over the weekend, with Citigroup prepared to go forward with a lawsuit if it can't reach a deal. Citigroup claims its preliminary agreement prevented Wachovia from seeking or negotiating with other buyers.

Wachovia was in considerable trouble when it agreed to the Citigroup deal early last week. Wachovia disclosed in court documents that it agreed to the acquisition "with the understanding that a seizure of its banking assets later that day by the Federal Deposit Insurance Corp. would occur" unless it accepted Citigroup's proposal.

© 2008 CNBC.com