Wall Street is growing increasingly skeptical about

PNC Financial's

(PNC) - Get Report

proposed purchase of scandal-tainted

Riggs National

(RIGS) - Get Report

, which is the subject of a federal money-laundering probe.

Shares of Washington, D.C.-based Riggs fell 3% on Monday after a bank analyst said the deal "is at risk of being delayed or scrapped in its entirety" because of the investigation. The stock is trading around $20.45 a share, a 16% discount to the proposed purchased price of $24.25 a share.

Gerard Cassidy, an RBC Capital Markets bank analyst, says if the deal doesn't go through, Riggs' stock "could fall to the mid-teens.''

A trader with a merger-arbitrage hedge fund, who didn't want to be identified, says "the arb community is very concerned about the Riggs deal.''

The pending merger is threatening to come unraveled as allegations of wrongdoing at Riggs have gotten worse since PNC announced the deal in mid-July.

A month after PNC said it would buy the 179-year-old bank for $779 million in stock and cash, federal prosecutors opened a formal investigation into allegations Riggs laundered money for former Chilean dictator Augusto Pinochet. Meanwhile, in September, a judge in Spain recommended that criminal charges be filed against several Riggs employees for helping to hide money and other assets for Pinochet.

Of course, the money-laundering allegations weren't exactly news when PNC agreed to buy the bank, which has 50 branches around Washington.

In May, Riggs paid a $25 million fine to settle a money-laundering investigation begun by the Treasury Department's Office of the Comptroller of the Currency. The fine, one of the biggest ever slapped on a bank, stemmed from alleged violations in Riggs' handling of bank accounts for several Saudi Arabian diplomats.

Just days before PNC announced the deal with Riggs, a Senate committee revealed that it had found evidence that Riggs helped set up phony offshore companies to hide Pinochet's assets from the prying eyes of bank regulators and foreign prosecutors. At a hearing to air those allegations, a number of senators scolded the bank's top officials, accusing Riggs executives of operating without a conscience.

But the swirl of controversy didn't deter PNC from coming forward with an offer that represented a 7% premium to Riggs' then stock price of $22.67. The reaction on Wall Street was mixed, with a number of analysts questioning it because of the many unresolved regulatory issues.

Shares of PNC rose 25 cents to $52.55 in Monday trading. The stock is up 3.5% since the deal was announced on July 15.

The merger agreement does provide a big escape clause for PNC if the Pittsburgh-based bank gets cold feet. Cassidy says the agreement allows the banks to cancel the deal if there are any "unresolved claims greater than $300,000.''

PNC, however, continues to stand behind the deal, despite the growing doubts. Brian Goerke, a PNC spokesman, says, "We're proceeding as planned."