Wells Fargo & Co. appears set to proceed with its acquisition of Wachovia Corp. after Citigroup Inc. bowed out of negotiations with the banks.

The two sides had tried to come to an agreement to split up Wachovia after conflict erupted when Wells Fargo trumped Citigroup's government-backed bid for the banking operations of the Charlotte, N.C.-based company. Wells Fargo - which will buy Wachovia intact without government support - said it expects to complete the $11.38 billion deal by the end of the year.

Standard & Poor's Friday upgraded its counterparty credit rating on Wachovia to A-plus from BBB-minus on the news and moved Wachovia's CreditWatch status to positive from developing.

The Wells Fargo deal could be better for the municipal market because it will acquire all of Wachovia - including its brokerage unit - and Wells Fargo's smaller presence in the market means they have limited overlap.

"This agreement represents a compelling value for Wachovia shareholders," Wells Fargo chairman Dick Kovacevich said in a statement. "It provides superior value compared to the previous offer to acquire only the banking operations of the company, and because Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world's great financial services companies."

The parties have agreed they will "no longer seek injunctive relief to prevent a transaction," according to the Federal Reserve. But Citi will pursue its $60 billion lawsuit against Wells Fargo and Wachovia, for tortious interference and bad faith breach of contract.

Citigroup said Wachovia would have failed without the original offer, and the agreement was just waiting to be finalized when the Wells Fargo deal was announced. Wachovia directors believed they had a fiduciary duty to accept the Wells Fargo's offer.

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

Citigroup said its initial offer still stands. The Federal Reserve noted the "considerable efforts" of Citigroup and Wells Fargo to come to an agreement, and said it "will immediately begin consideration" of the files Wells Fargo submitted for the transaction's approval.

Elsewhere, Mitsubishi UFJ Financial Group reiterated its commitment to invest $9 billion in Morgan Stanley - noting Friday that it planned to close the deal today - after doubts surfaced about the transaction. Shares of Morgan Stanley have plummeted the past week, opening at $22.49 Monday and closing at $9.68 Friday.

Moody's Investors Service placed the A1 long-term debt rating of Morgan Stanley on review for downgrade last week, noting that the downturn in the global capital markets will hurt the bank's revenue and income. The firm will also need to adjust to its status as a bank holding company.

"This could limit profit opportunities for Morgan Stanley, though the firm's risk profile could be lowered, thus mitigating this concern," Moody's said.

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