Wachovia falls and Nat City gains on deal talk

NEW YORK (Reuters) - Wachovia Corp slumped about 16 percent on concern talks to divvy up the troubled bank had hit a snag, leading a broader drop in U.S. regional banks.

Wachovia shares, as well as those of competing buyers Wells Fargo & Co and Citigroup Inc , dropped after the Wall Street Journal reported talks between the three about potentially splitting Wachovia were hung up on several issues.

After looking deeper into Wachovia's books, Citigroup and Wells Fargo have been surprised by the concentration of assets they regard as low-quality, the paper said.

A source close to Citigroup denied the bank had found anything unexpected in Wachovia's books since negotiating its initial deal with FDIC backing.

"There was a reason we structured the deal the way we did," the source said. "Our view of that portfolio has not changed and anything we do will reflect our view that the inherent risks in the portfolio need to be managed very carefully. I have no idea where this idea that both sides are surprised is coming from."

Citigroup spokeswoman Shannon Bell declined to comment as did Wells Fargo spokesman Larry Haeg. Christy Phillips-Brown, a spokeswoman for Wachovia, declined to comment.

In afternoon trading, Wells Fargo shares were down 12 percent at $28.02, while Citi shares were 4.4 percent lower, at $13.76. Other large regional financials such as KeyCorp slid more than 20 percent. The KBW Banks index <.BKX> slipped over 4 percent.

One major exception to the slide in banking stocks were shares in National City Corp , which rose more than 15 percent on a report the bank may be in talks to be acquired.

Potential bids for National City are seen coming from PNC Financial Services Group Inc , Pennsylvania's largest bank, and Toronto-based Bank of Nova Scotia , the Wall Street Journal said, citing people familiar with the situation.

A NatCity spokeswoman declined to comment specifically on the story.

"National City is a strong, stable and well-capitalized institution," she said.

Officials from Scotiabank could not immediately be reached for comment. A PNC spokesman declined comment on the report.

Cleveland-based National City is viewed as one of the weaker regional banks hard-hit by the credit crunch and, unlike fellow strugglers Washington Mutual Inc or Wachovia Corp it has not yet found a buyer.

The bank has major presences in Ohio, Michigan and Florida, areas that have been devastated by the housing crisis. The bank's shares have fallen more than 80 percent this year.

(Reporting by Elinor Comlay and Christian Plumb in New York, with additional reporting by Savio D'Souza in Bangalore, Paritosh Bansal in New York and Lynn Olver in Toronto; Editing by Andre Grenon)

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