Wachovia shares fall, Nat City gains, on deal talk

NEW YORK (Reuters) - Wachovia Corp shares slumped more than 24 percent on Thursday on concerns that talks to split up the troubled bank 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 , all fell after the Wall Street Journal reported that talks between the three about potentially splitting Wachovia were hung up.

One major exception was National City Corp , which rose more than 15 percent as the report said the bank holding company may be in talks to be acquired.

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

A NatCity spokeswoman and a PNC spokesman declined to comment on the report. Officials from Scotiabank could not immediately be reached for comment.

Wachovia is among many regional banks that found themselves at the fore of the credit crunch, holding large portfolios of toxic mortgages as the value of borrowers' houses dropped and they became unable to meet payments on the loans.

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 Journal 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."

Representatives for all three banks declined to comment.

On the New York Stock Exchange late Thursday afternoon, Wells Fargo fell 17 percent to $26.46; Citi dropped 7 percent to $13.41; and other large regional financials such as KeyCorp slid 23 percent to $6.93. The KBW Banks index <.BKX> dropped 9.8 percent.

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"It's the same old concerns that we have had now for quite some time, except the pressure continues to increase and the fears continue to increase," said Terry McEvoy, analyst at Oppenheimer & Co.

McEvoy said fears that these banks may need additional capital is dragging the stocks down, and the removal of the U.S. government's ban on selling these shares short is adding to the move downwards.

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 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, Richard Chang)

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