The lack of government support may make the Wells Fargo bid more attractive for regulators, analysts speculated, and some even argued that Citi ought to walk away.
"It's the right thing for the country for Citi to back off," said Bill Hackney, managing partner at Atlantic Capital Management, which has $8 billion under management and owns Wells Fargo shares.
Wells shares closed down about 1.7 per cent, after rising earlier in the day, while Wachovia shares closed up nearly 59 per cent. Citigroup shares finished down about 18.4 per cent.
Lawyers said Citigroup has a real case based on its exclusivity agreement and the fact that it has been providing support to Wachovia this week.
If Wells Fargo goes through with this deal, it will acquire $122bn of "option pay" mortgages, where borrowers can choose every month whether to only pay interest on their mortgages, pay a portion of their loan or pay less than the interest due.
In a plummeting housing market, such assets are seen as highly toxic, and Wells Fargo said it expects to write the assets down by $32 billion over time.
The bank estimates the total assets it is taking on will have to be written down by $74bn in the years following the deal.
Wells Fargo is set to issue up to $20bn of securities, mostly common equity, to help offset those losses.
These are big numbers for Wells Fargo, whose net worth as a company as measured by balance sheet shareholders' equity, was about $48 billion at the end of June.
Wells Fargo may be able to secure some support through a $700bn government bailiout to buy bad assets that the House of Representatives approved on Friday afternoon.
Acquiring Wachovia would bolster Citi's weak network of nationwide branches [AFP]
The strategic benefits to Wells Fargo are compelling to some analysts. Wachovia has a strong branch presence on the East Coast, patching a major gap in Wells Fargo's network.
US banks have been scrambling to build or buy branches, which allow them to raise money from depositors. In a credit crunch, deposit funding can be cheap compared to borrowing in bond markets.
Wells Fargo is one of the few major US banks that has remained consistently profitable during the credit crisis, despite being headquartered in California, the state that has suffered most during the US housing crisis.
Citigroup, meanwhile, has posted more than $17bn of net losses in the last nine months.
Acquiring Wachovia's branches would help Citi bolster its relatively weak network of US 1,000 branches, compared with Wachovia's 3,300 and Wells Fargo's 3,400.
"For Citigroup, this is a real loss ... This was a deal that was going to save them as much as it was saving Wachovia," Cassandra Toroian, chief investment officer at Bell Rock Capital in Paoli, said.
In a joint statement, bank regulators at the US Federal Reserve and the Office of the Comptroller of the Currency said they would work with all parties to achieve the best outcome.
For each share of Wachovia, investors will receive 0.1991 Wells Fargo share, which is equal to $7 a share based on Wells Fargo's closing price on Thursday of $35.16.
Wachovia closed at $3.91 on Thursday, meaning that Wells Fargo is paying a 79
per cent premium to Thursday's closing price.
The combined company will base its East Coast retail and commercial and corporate banking business in Charlotte, North Carolina.
Wells Fargo, which would retain its name once the banks combined, is based in San Francisco.
Wachovia shares closed up $2.30 to $6.21, Wells closed down 60 cents to $34.56, and Citigroup closed down $4.15 to $18.35.