Updated from 8:03 a.m. EDT

Citigroup

(C) - Get Report

Wednesday said it will acquire the mortgage banking unit of

Principal Financial Group

(PFG) - Get Report

for about $1.26 billion.

The transaction includes approximately $6.9 billion in assets, as well as $137 million of franchise premium. It is expected to close by the end of the year.

The deal comes amid growing market jitters about higher interest rates and what appears to be a slowdown in mortgage-related financing, after several boom years driven by rock-bottom interest rates. But it will bolster Citigroup in a lending arena where it is not as strong a player as some of its rivals, namely

J.P. Morgan Chase

(JPM) - Get Report

and

Bank of America

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.

Citigroup said it expects the acquisition to be accretive to 2004 earnings and is subject to customary regulatory approvals. The transaction is expected to close prior to year-end.

Principal Residential Mortgage is based in Des Moines, Iowa, and is one of the largest independent mortgage companies in the United States. The deal helps Citigroup "grow our servicing portfolio and customer base," the company said.

Meanwhile, the deal between Citigroup and Principal Financial could complicate efforts by

Cendant

(CD)

to sell its mortgage arm. The consumer services conglomerate has been trying to find a buyer for its mortgage division for several months, but has yet to find a taker.

TheStreet.com

previously reported that several banks, including Citigroup, passed on an opportunity to buy Cendant's mortgage business, valued at roughly $1 billion. It's widely believed that the most interested buyer is

Countrywide Financial

(CFC)

, one of the nation's largest mortgage originators. Earlier this year, Countrywide, which historically has shied away from doing major acquisitions, said the cooling of the refinance and mortgage market might present some ''unusual acquisition opportunities.''