Wells Fargo to get Wachovia as Citigroup walks away

— -- The merger throw-down over troubled Wachovia wb took another startling turn Thursday when Citigroup c walked away from the fight, leaving Wells Fargo wfc to claim victory and declare it will move ahead with its original merger offer.

Wells Fargo Chairman Dick Kovacevich called the merger "simply an incredible fit," while Wachovia CEO Robert Steel said the deal would create "one of the strongest financial firms in the world."

The Federal Reserve, which tried to broker a deal among all three banks, said it would immediately begin the approval process.

If approved by regulators, a Wells Fargo-Wachovia banking behemoth would rival Bank of America, the largest U.S. bank. The new bank would boast $787 billion in deposits, 280,000 employees and 48 million customers.

In a statement, Citigroup said that "dramatic differences in the parties' transaction structures" and "their views of the risks involved" make a deal for Wachovia impossible at this stage.

The Citigroup retreat comes after a week-long legal fight over t Wachovia, one of the largest U.S. banks beset by mortgage-related losses. Citigroup had offered $2.1 billion last week to buy Wachovia's retail, corporate and other operations, with the U.S. government absorbing some of Wachovia's losses. But Wachovia's board got a better offer last Friday from Wells Fargo, which agreed to acquire all of Wachovia for stock.

Wells Fargo's all-stock bid was originally valued at $15 billion, but its stock price has fallen since the offer was announced.

Citigroup said it will cease legal action blocking a Wells Fargo-Wachovia merger but will continue to sue Wachovia and Wells Fargo for alleged breach of contract and interference with the contract.

In a statement, Citigroup said, "Our shareholders have been unjustly and illegally deprived of the opportunity the transaction created."

Robert Patten, managing director at Morgan Keegan & Co., says Citigroup's decision to not thwart the merger is "the right thing to do for Wachovia and a banking system that's crippled with a lack of trust and confidence."

The upside of a Wells Fargo-Wachovia merger, according to Patten: San Francisco-based Wells Fargo and Wachovia of Charlotte make a strong geographic match.

The downside: Wells Fargo's earnings would suffer over the next few quarters as the bank absorbs more than $40 billion in Wachovia's mortgage and commercial real estate losses.