Oct. 5 (Bloomberg) -- Citigroup Inc. said a New York state court judge extended the bank's sole right to negotiate with Wachovia Corp. after Wells Fargo & Co. launched a competing bid for the North Carolina lender.

New York State Supreme Court Judge Charles Ramos issued an emergency order last night that preserves Citigroup's ``exclusivity agreement'' with Charlotte-based Wachovia ``until further order of the court,'' Citigroup said in an e-mailed statement. The accord was set to expire tomorrow. The two banks must appear before Ramos on Oct. 10, according to the statement.

Citigroup, the biggest U.S. bank by assets, is bidding for Wachovia while trying to rebuild after $61 billion of losses tied to the collapse of mortgage markets. The bank wants to buy parts of Wachovia for about $2.16 billion, and Wells Fargo is bidding about $15 billion for the whole company. Citigroup may seek $60 billion in damages from Wells Fargo, the New York Times reported, citing a person briefed on the matter.

``Wachovia believes its agreement with Wells Fargo is proper, valid and is in the best interest of shareholders, employees and the American taxpayers,'' said Christy Phillips Brown, a Wachovia spokeswoman. ``Under that agreement, Citigroup is always free to make a superior offer to Wachovia.'' A spokeswoman for Wells Fargo didn't reply to requests for comment.

Citigroup's stock fell 18 percent Friday after San Francisco-based Wells Fargo, the biggest U.S. bank on the West Coast, topped the New York-based bank's offer for Wachovia.

Damage in Doubt

``Wachovia breached by negotiating; the problem is Citigroup's damages,'' said Antony Page, associate professor at the Indiana University School of Law in Indianapolis. Citigroup and Wachovia signed a non-binding term sheet, rather than a formal merger accord, which Page said casts doubt on damage claims. ``At most, they'd get a termination fee,'' he said.

The banks presented oral arguments at Ramos's home in Connecticut yesterday, according to a person familiar with the situation. Wachovia's representatives are preparing for another hearing on the case that may take place as early as today, the person said.

``Any such agreement between Wachovia and Wells Fargo is illegal,'' Vikram Pandit, 51, Citigroup's chief executive officer, said in an e-mail Friday.

Competing Claims

Wells Fargo Chairman Richard Kovacevich, 64, told investors during a conference call the accord with Wachovia is ``solid'' and he said it doesn't rely on federal assistance like Citigroup's bid.

``The taxpayer doesn't pay a penny'' for the deal, Kovacevich said Friday in an interview. His company's bid is also superior because the price is higher and the two combining banks ``share similar cultures and values,'' he said.

Citigroup dropped $4.15 to $18.35 on Friday in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21. Wells Fargo declined 1.7 percent to $34.56.

Citigroup demanded Wells Fargo abandon the takeover. Buying Wachovia would give Citigroup the third-biggest U.S. bank network and cement its status as the nation's largest lender by assets. Citigroup may increase its offer, said a person with knowledge of the deliberations.

``I'm still not convinced that Citigroup can force this sale to happen,'' said Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans and a former M&A lawyer at Sullivan & Cromwell. ``Citigroup may be facing the chance to get themselves a small settlement, and that's a nice shot in the arm for a company that's struggling.''

Regulators

The Federal Deposit Insurance Corp. helped broker Citigroup's purchase when Wachovia's health faltered. Chairman Sheila Bair said until a review of Wells Fargo's offer is completed, the agency will stand behind the Citigroup deal.

``We wanted to make clear that until things are settled with what's going on with this Wells bid, that the Citi deal was still there,'' Bair said Friday in an interview on Bloomberg Television's ``Political Capital with Al Hunt.'' Bair said the FDIC is reviewing the offer, and she told Hunt: ``You shouldn't'' assume the U.S. opposes Wells's offer.

Other bank regulators said they haven't evaluated Wells Fargo's offer.

``We have not yet reviewed the new Wells Fargo proposal and the issues that it raises,'' the Federal Reserve and Office of the Comptroller of the Currency said Friday in a statement. ``The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.''

Wells Fargo's Plan

Wells Fargo, run by Chief Executive Officer John Stumpf, had avoided bets on the subprime-mortgage market that contributed to $588 billion in writedowns and credit losses for financial firms worldwide. Wachovia in 2006 purchased Oakland, California-based Golden West Financial Corp. for $24 billion, acquiring a portfolio of option-adjustable rate mortgages that helped lead to $9.6 billion in losses this year.

Wells Fargo, in bidding for Wachovia, deviates from a strategy of seeking smaller acquisitions with less risk to fill gaps in its branch network. After the combination, the bank would have $1.42 trillion in assets, which may rank third in the U.S. depending on what other bank mergers are completed. It would have 10,761 branches in 39 states.

``Citi's purchase was too cheap for the assets and operations involved,'' said Jason Pride, research director at Haverford Trust Co. in Haverford, Pennsylvania. ``It's an excellent strategic deal for Wells Fargo given the geography of the branch network.''

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: October 5, 2008 12:06 EDT