Citigroup said it's ended negotiations with Wells Fargo in their fight to acquire Wachovia—but Citigroup's effort to grab some assets of Wachovia may not be over just yet.
Sources inside Citigroup told CNBC that the bank believes Wells Fargo will have to settle claims of tortious interference of contract that Citigroup has made against it before any merger between Wells Fargo and Wachovia can take place.
Such a settlement could include handing over some of Wachovia's deposits, sources said.
Citigroup agreed last week to buy Wachovia's banking operations for $2.1 billion in a deal orchestrated by the government. Four days later, Wells Fargo stunned Citigroup by announcing that Wachovia's board had agreed to an $11.7 billion all-stock offer. Originally, the deal was valued at $15.1 billion, but Wells Fargo stock has declined since it was announced.
The parties had agreed to a legal standstill, which was set to end Friday, after the battle for the Charlotte, N.C.-based bank moved to court.
Late on Thursday Citigroup announced that it believes it has strong legal claims against Wachovia and Wells Fargo .
"Citigroup plans to pursue these damage claims vigorously on behalf of its shareholders,'' Citi said. "However, Citigroup has decided not to ask that the Wells Fargo-Wachovia merger be enjoined."
As CNBC reported earlier, talks between Citigroup and Wells Fargo over Wachovia's assets hit an obstacle Thursday as the parties tried to negotiate which bank would take ownership of Wachovia's branches in the Mid-Atlantic region.
The Federal government was pushing Citigroup and Wells Fargo to reach an agreement and avoid a court battle over Wachovia, sources told CNBC.
The talks had centered on an arrangement between Citigroup and Wells Fargo, whereby Citigroup would have received between 20 percent and 25 percent of Wachovia's $440 billion in deposits.
Wells Fargo would have gotten the remainder of the firm, including the rest of Wachovia's deposits and its investment bank.
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 wanted to acquire Wachovia's bank branches in the Northeast and Mid-Atlantic regions, according to senior executives at Citigroup.
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.
- Wire services contributed to this report.