Wachovia saved from bankruptcy by Citigroup

Citi will absorb $42 billion of losses from a pool of $312 billion of loans held by Wachovia, which has seen its shares crash in the last year.

In New York, the deal was met with disappointment after Citi cut its dividend in half and said it will have to raise $10 billion in new capital.

Citi shares fell 35 cents to $19.80 while Wachovia dived more than 80% to $1.91 before being suspended.

The Dow Jones Industrial Average plummeted 313.5 points to 10829.6.

Under the deal — negotiated with the US Federal Reserve and the Federal Deposit Insurance Corporation, America's version of Britain's Financial Services Compensation Scheme — depositors are guaranteed the first $100,000 of their cash.

The FDIC said Citi will buy the bulk of the bank's assets and liabilities. On toxic loans, it has entered a loss-sharing arrangement with the FDIC.

It is thought Wells Fargo was also a possible buyer of the assets but pulled out of talks at the last minute.

Details about how much Wachovia shareholders will be getting were not immediately forthcoming, but they are expected to be largely wiped out.

Pressure on Wachovia to make a deal grew last week when JPMorgan bought Washington Mutual (WaMu), making big writedowns on loans as it did so.