Citigroup ( C), Wells Fargo ( WFC) and Wachovia ( WB) have agreed to halt their burgeoning legal battle through Wednesday, as they work with the Federal Reserve to resolve the disagreements resulting from two competing deals for the ailing North Carolina bank last week.

Wachovia would have failed last week if Citi hadn't heeded the federal government's call to purchase its banking operations for $2.16 billion the day before, Citi said in announcing a $60 billion lawsuit against Wachovia and Wells Fargo for breaching an exclusivity agreement by trumping its deal. Citi said Wells Fargo "walked away" from a deal before federal authorities called on Citi to help.

The banks have now agreed to put all formal litigation on temporary hold, according to statements by all three firms. The "standstill agreement" will expire at noon on Wednesday.

Wells Fargo on Friday struck a deal with Wachovia to acquire all of the Charlotte, N.C.-based bank in an all-stock bid totaling roughly $15 billion, or $7 a share. Wells and Wachovia touted the offer as clearly superior for Wachovia shareholders, since it did not require any government assistance. Citi, by contrast, made its deal with the Federal Deposit Insurance Corp. agreeing to take on possible losses on Wachovia's loan portfolio.

On the other hand, Citi did come to the table when the Federal Deposit Insurance Corp. needed it. And regardless of whether Citi's lawsuit has merit at this point, it would probably be in the best interests of the FDIC to come up with a compromise to keep Citi happy, says Sandeep Dahiya, an associate finance professor at Georgetown University.

"Citi put the skin in the game when the sky was falling," Dahiya says. "For Wells Fargo to come and now offer a much higher price is food for shareholders, but when the regulators wanted someone to help out, Wells Fargo did not step up because at that time it was too risky. My sense is Wells Fargo came out when the bailout package was already finalized."

Media reports have said that the San Francisco-based Wells Fargo had also been considering making an offer under the FDIC's bidding process, but backed away at the last minute. That left Citi as the only viable contender, reports say.

Wells then made an about face with a formal offer to Wachovia late Thursday evening, which the bank's CEO Robert Steel accepted.

The FDIC had said on Friday that it stood behind the Citi deal and that it would be "reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest."

But if the FDIC goes back on its word of supporting the Citi deal, it will sour its reputation and lining up future buyers should another bank tumble or fail will be difficult, Dahiya says.

FDIC chairwoman Sheila Bair said at an economic conference on Monday that regulators were working to come to a "solution and outcome that serves the public interest and I think we will have one today," according to the Wall Street Journal.

An FDIC spokesman did not return a phone call on Monday.

Dahiya said "there is more in this deal for Citi than there is for Wells Fargo," given its need for deposits. Citi, in announcing its lawsuit, said it "was always a deal Citi wanted rather than one we needed." Indeed, the bank has been active in getting its side of the story out to the media since the Wells Fargo deal was announced, sending a flurry of press releases in response to each twist and turn in the drama.

"We were and remain very excited about this transaction and how it will benefit the clients and shareholders of Citi and Wachovia, as well as help preserve the stability of the financial system," the bank said in the statement.

Citi reiterated that it had been providing liquidity support to Wachovia since its deal was announced.

A Wachovia spokeswoman said the bank "continues to believe its agreement with Wells Fargo, which involves no government assistance, is proper and valid," according to a statement. "The agreement is in the best interests of shareholders, employees, creditors and retirees as well as the American taxpayers and it imposes no risk to the FDIC fund."

Wells Fargo declined to comment.

Earlier on Monday, the Wall Street Journal reported Fed officials were pushing for Citigroup and Wells Fargo to reach a compromise. The effort could result in carving up Wachovia between its two suitors, the Journal reported, citing people familiar with the situation.

Under a plan being discussed Sunday night, Citigroup and Wells Fargo would divide Wachovia's network of 3,346 branches along geographic lines, with Citigroup getting Wachovia's branches in the Northeast and mid-Atlantic regions and Wells Fargo taking those in the Southeast and California. Wells Fargo also would take over Wachovia's asset-management and brokerage units, the Journal reports.

The plans being discussed Sunday night don't involve either Citigroup or Wells Fargo receiving financial assistance from the U.S. government, according to the Journal.

Dahiya says a carving out of Wachovia between the two banks is a possibility, but the most likely outcome is that Wells Fargo settles with Citi to drop the legal battle and let it proceed with its merger.

"What is the amount that Wells Fargo would have to offer Citibank at which point Citibank will say 'OK, fine.' Anything less than $2 billion seems not worth it. It's a price that Wells Fargo can easily make if they want Wachovia badly enough and it's face-saving," Dahiya says.

Mike Mayo, an analyst at Deutsche Bank, says that while Citi may have legitimate claims, its "only plausible path to winning Wachovia at this point is an economic response involving an alternative offer that matches or betters the Wells Fargo transaction," according to a note on Monday.

"But for that to be a practical possibility in light of the preferred share issuance, it is not sufficient for Citi simply to convince a court to find that the Wells Fargo transaction violated the exclusivity agreement," Mayo writes. "Citi must also find a court willing to invalidate parts of the agreement between Wachovia and Wells Fargo, which in our opinion is not likely at this point."