Oct. 7 (Bloomberg) -- Wachovia Corp.'s regulators and suitors are using a two-day legal truce to see if splitting the North Carolina bank between Citigroup Inc. and Wells Fargo & Co. will settle their takeover battle.

Federal Reserve Governor Kevin Warsh is leading efforts to resolve the dispute over Wachovia, the sixth-biggest U.S. bank, according to a person with knowledge of the talks. Regulators increasingly favor the idea of dividing Wachovia after Citigroup bid $2.16 billion for the banking operations and Wells Fargo offered $15 billion for the whole company, said the person, who declined to be identified because talks are private.

Citigroup and Wells Fargo are competing for control of Wachovia's $448 billion in deposits in 21 states after its near collapse. Talks may be stalled because splitting the Charlotte- based bank's units from each other has proven harder than expected and customers may be alienated once they learn which bank they've been assigned, analysts said.

``It is going to be a mess trying to divide up the deposits,'' said Morgan Keegan & Co. analyst Robert Patten. ``But the loans that go with the relationships are even more important.'' He called carving up Wachovia ``a horrible idea.''

Wells Fargo may get 75 percent to 80 percent of Wachovia's deposits as the talks now stand, Reuters reported, citing a person briefed on the matter.

Citigroup's Obstacles

More drawbacks face New York-based Citigroup than San Francisco-based Wells Fargo because of opposition from Wachovia shareholders, employees and customers, said analyst Nancy Bush of NAB Research LLC in Annandale, New Jersey.

Citigroup, which promised to base its retail bank in Charlotte according to Wachovia, will get ``a lot of customers who will just walk away,'' Bush said. ``Nobody believes that Citi would really let Wachovia run the banking operations.''

Wells Fargo spokesman Larry Haeg and Citigroup's Shannon Bell declined to comment. Wachovia's Christy Phillips Brown said it has ``a proper and valid merger agreement with Wells Fargo.''

Wachovia fell 53 cents, or 9.2 percent, to $5.25 at 4:15 p.m. in New York Stock Exchange composite trading after the suitors agreed yesterday to a two-day legal truce. The Federal Reserve sought the standstill as the Federal Deposit Insurance Corp., which had backed Citigroup, tried to broker a compromise for Wachovia, which stood near bankruptcy last week.

Citigroup sued Wachovia and Wells Fargo for $60 billion, claiming their agreement signed on Oct. 3 violated terms of Citigroup's earlier deal. The suit seeks more than $20 billion in compensatory damages and $40 billion in punitive damages, according to a complaint filed yesterday in New York State Supreme Court in Manhattan.

Rebuilding

FDIC Chairman Sheila Bair said yesterday that the banks and regulators were ``working together to reach an outcome that serves the public interest.''

Vikram Pandit, 51, Citigroup's chief executive officer, is counting on the purchase of Wachovia's banking operations to help rebuild after three quarters of losses tied to the global credit crunch. Wells Fargo, led by Chairman Richard Kovacevich, 64, is bidding about $7 a share, trumping Citigroup's $2.16 billion offer for parts of the bank, which works out to about $1 a share. Citigroup's bid was backed by the FDIC.

``Citi should fold their tent and leave the scene,'' said Gary Townsend, president of Hill-Townsend Capital LLC, an investment firm in Chevy Chase, Maryland, that specializes in banks. ``Why should regulators agree to a sale where it means taxpayer involvement, when we have another willing buyer who isn't seeking government involvement?''

David George at Robert W. Baird & Co. said the differences can be reconciled and that a deal could be in place by the end of the week.

If the truce expires without an accord, said analyst Kevin Fitzsimmons at Sandler O'Neill & Partners LP in New York, ``we might be going months instead of days without knowing what happens.''

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: October 7, 2008 16:41 EDT