NEW YORK (CNNMoney.com) -- Citigroup will acquire the banking operations of Wachovia for $2.2 billion in an all-stock deal, following much speculation over the weekend about the fate of the nation's fourth-largest bank.
Citigroup, the nation's largest bank based on assets, also announced it would raise $10 billion through a sale of common stock and that it would slash its quarterly dividend yet again, cutting it in half to 16 cents a share to preserve capital.
As part of the deal, Citigroup will acquire Wachovia's massive deposit network, about $53 billion in the company's debt, as well as more than $300 billion of Wachovia's loan portfolio.
Following completion of the acquisition, Citigroup will have more than $600 billion in deposits in the U.S., about a 9.8% market share. Total deposits worldwide will be $1.3 trillion.
Citigroup said it will absorb up to $42 billion of losses on those loans, while the Federal Deposit Insurance Corporation will be on the hook for anything beyond that.
Regulators also stressed that consumers who bank with Wachovia would not experience any interruption in service and that their deposits remained protected.
"Today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits," said FDIC Chairman Sheila Bair.
Citigroup CEO Vikram Pandit called the transaction "extremely attractive" from a strategic perspective, saying it would augment the company's access to funding and liquidity.
Banking regulators, who helped broker the deal following consultations with President Bush, the Federal Reserve and Treasury Secretary Henry Paulson, viewed the deal as necessary to avoid what could have been a painful fallout for both the economy and the already fragile financial system.
"A failure of Wachovia would have posed a systemic risk," Paulson said in a statement.
Shares of Wachovia (WB, Fortune 500) were halted when the stock market opened Monday. The stock plunged more than 90% in pre-market trading, to 94 cents a share. Citigroup (C, Fortune 500) shares edged higher in morning trading.
However, Wachovia will remain a publicly traded company -- albeit in much smaller form.
The Charlotte, N.C.-based firm will hold onto its massive brokerage business, which grew substantially following its $6.7 billion acquisition of A.G. Edwards last year. Wachovia also owns the Evergreen investment management division, which had more than $245 billion in assets as of June 30.
Heading into the weekend there was rampant speculation that the Charlotte, N.C.-based Wachovia would be sold to either Citigroup or Wells Fargo (WFC, Fortune 500). Even Spain's Banco Santander (STD) had been mentioned as a possible bidder. By Sunday evening, a bidding war between the two banking giants was underway, The New York Times reported.
There had also been talk in recent weeks that Morgan Stanley (MS, Fortune 500), which recently converted itself into a commercial bank from a stand-alone investment bank, was discussing a possible merger with Wachovia.
Following a string of high-profile collapses of banks in recent weeks including WaMu and the demise of Lehman Brothers, there has been increasing speculation that Wachovia could be the next one to go.
Like many of its peers, Wachovia bet big on the U.S. mortgage market, which prompted it to suffer losses over the past two quarters.
Some analysts have blamed the company's ill-timed 2006 acquisition of the California mortgage lender Golden West Financial Corp. for the company's woes.
At the same time, Citigroup has been no picture of health. The New York City-based financial services giant has posted close to $18 billion in losses over the past three quarters, while taking nearly $50 billion in writedowns on its diverse loan portfolio.
The deal for Wachovia also comes as somewhat of a surprise given recent efforts by Citi's leadership to shrink the company.
Citigroup's Pandit, who was installed as the company's chief executive last December, unveiled plans in May to unload more than $400 billion in assets over the next few years in the hopes of turning the company around.
The deal, which comes ahead of a Congressional vote on a proposed $700 billion bailout for the financial system, marks yet another big shake-up of the nation's banking industry.In the past two weeks, the sector has undergone a dramatic transformation, including Lehman's bankruptcy, the acquisition of Merrill Lynch by Bank of America (BAC, Fortune 500) and the government takeover of insurer AIG (AIG, Fortune 500).