Wachovia Corp. has walked away from a deal to sell its banking operations to Citigroup Inc., agreeing to be acquired by Wells Fargo & Co. instead.

Wells Fargo and Wachovia announced that they have signed a definitive agreement for the merger of the two companies including all of Wachovia’s banking operations in a whole company transaction requiring no financial assistance from the Federal Deposit Insurance Corp. or any other government agency. The FDIC had engineered the sale of Wachovia’s banking operation to Citigroup Inc.

Under the agreement, Wells Fargo will acquire all outstanding shares of common stock of Wachovia in a stock-for-stock transaction, valued at $15.1 billion. It will acquire all of Wachovia and all its businesses and obligations, including its preferred equity and indebtedness, and all its banking deposits.

The agreement has been approved unanimously by the boards of both companies, but requires the approval of Wachovia shareholders and regulators.

Wells Fargo expects to incur merger and integration charges of approximately $10 billion. To maintain its capital position, it intends to issue up to $20 billion of new securities, primarily common stock.

“This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support. The market presence and composition of our businesses, along with our service-oriented cultures, are extraordinarily complementary and this combination creates great potential for sustained stability and growth,” says Robert Steel, president and CEO of Wachovia.

“This agreement represents a compelling value for Wachovia shareholders,” says Wells Fargo chairman Dick Kovacevich. “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.”

In response to the announcement, the board of governors of the Federal Reserve and the Office of the Comptroller of the Currency issued a statement indicating that the Citigroup-Wachovia deal has undergone extensive review by the Fed and the OCC, but this new deal hasn’t been vetted by them yet.

“We have not yet reviewed the new Wells Fargo proposal and the issues that it raises. The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability,” they say.