The Citi announcement ended days of high-stakes negotiations among the banks and the government, which feared that a collapse of Wachovia would further stagger the U.S. financial system.

Citi's announcement came after a horrendous day on Wall Street, with the Dow Jones industrial average falling 678 points, or about 7 percent, to 8,579.19 on fears of a global recession and the impact of the credit crisis.

A standstill agreement between the banks, which had been negotiating for days, was set to expire today.

In the deal, according to regulatory filings, Wells Fargo will pay 0.1991 of its shares for each Wachovia share - which amounted to $5.42 a share for Wachovia stockholders at yesterday's close.

In after-hours trading, Wachovia stock soared to match the price. It closed at $3.60, so the deal was a premium, but far off Wachovia's 52-week high of $51.41.

Wells Fargo stock fell 14.58 percent yesterday, to close at $27.25, but rose slightly in after-hours trading.

In a statement last night, Wachovia, based in Charlotte, N.C., said: "We look forward to completing our merger with Wells Fargo, which we have always believed is in the best interest of shareholders, employees, creditors and retirees as well as the American taxpayers, and it imposes no risk to the FDIC fund. Our board made the right fiduciary decision for all of our constituents, and we look forward to consummating our merger with Wells Fargo."

Wells Fargo chairman Dick Kovacevich called the merger "an incredible fit that will result in an immensely strong, stable financial-services company."

The Federal Reserve said it would immediately begin consideration of the filings submitted by Wells Fargo for approval to acquire Wachovia.

Wachovia, one of the nation's largest banks, rapidly deteriorated this year because of the housing downturn. The root of its demise was a calamitous misstep in 2006, when it acquired California mortgage lender Golden West Financial Corp. at the height of the housing boom for $24.2 billion.

A painful legacy of that deal is a $122 billion portfolio of adjustable-rate mortgages that allowed borrowers to choose how much to pay each month.

In July, Wachovia's board hired Robert K. Steel, a former executive with the Goldman Sachs Group Inc., out of the U.S. Treasury Department to turn the bank around. But its fate was sealed last month after the Lehman Bros. Holdings Inc. bankruptcy and the government bailout of the American International Group Inc.

Wachovia, with $422 billion in deposits, was an enticing target for both Citigroup and Wells Fargo. Though Citigroup has $2 trillion in assets, its deposit base is relatively small at $266 billion as of June. It has 1,019 branches, far fewer than Wachovia's 3,346. Wachovia would have made Citigroup far less dependent on volatile capital markets for funding.

Wells Fargo, on the other hand, already had a large branch network and deposit base, but little retail-banking presence east of Indiana.

If the Wachovia deal closes, which Wachovia shareholders must approve, Wells Fargo will have a national network of branches. In the Philadelphia region, Wachovia has about 200 branches, the largest share of deposits and 6,400 employees.

The Wachovia name graces the South Philadelphia arena where the Flyers and Sixers play. There was no comment from Wachovia on whether the name would remain.

Wells Fargo estimated that, in the accounting for its proposed purchase of Wachovia, it would record $65 billion in losses - or 13 percent - on $498 billion of Wachovia loans.

Jaime Peters, a bank analyst with Morningstar Inc., said Wells Fargo and Wachovia would be a great pair, but she said Citigroup's vow to continue fighting in court for restitution could spell trouble. "It's a lot of money they are seeking, and that could cause problems."

Citigroup sued Wachovia and Wells Fargo on Monday in the Supreme Court of the State of New York for breaking the deal it reached Sept. 29 to buy the Wachovia banking operations for about $1 a share. Citi seeks $20 billion in compensatory damages and $40 billion in punitive damages.

In a statement issued after the stock markets closed, Citi said: "Without our willingness to engage in this transaction, hundreds of billions of dollars of value would have been seriously threatened. We stood by while others walked away. Now, our shareholders have been unjustly and illegally deprived of the opportunity the transaction created."

Citi said it had strong legal claims against Wachovia, Wells Fargo and their officers, directors, advisers and others for breach of contract. Citigroup plans to pursue the claims, but will not ask a judge to stop the Wells Fargo-Wachovia merger.

Citi shares closed down $1.47, or 10.21 percent, at $12.93, and were flat in after-hours trading.