Updated from Thursday, Oct. 9

Wells Fargo ( WFC) has triumphed in its battle with Citigroup ( C) for the rights to their struggling competitor, Wachovia ( WB).

Citi said on late Thursday that it was breaking off negotiations and proceeding with a lawsuit against Wachovia and Wells Fargo, which agreed to a deal last week, trumping an earlier deal between Wachovia and Citi.

Citi, however, said it would not seek to block the deal between Wachovia and Wells after failing to come to an agreement after days of negotiations. Citi cited "dramatic differences" in their views over the transaction structure and risks involved. The dueling banks had initially agreed to halt litigation related to the competing deals through 8 a.m. on Friday.

Citi says it is still willing to go through with the deal it offered. However, the company is still seeking "compensatory and punitive damages for bad faith breach of contract and tortious interference" in the $60 billion lawsuit it filed Monday.

Citi on Sept. 29 had agreed to take over Wachovia's banking operations for $2.16 billion, or about $1 per share, in a deal pushed forward by the Federal Deposit Insurance Corp. On Oct. 3, Wells trumped that plan with its own offer of $15.1 billion, or $7 per share, to acquire all of Wachovia. Wells' offer did not require FDIC assistance, while Citi's required the government to take on potential losses on part of Wachovia's loan portfolio

Citi said that without its willingness to acquire Wachovia on Sept. 29, the bank would have failed. It noted Wells had "walked away" from a deal prior to the FDIC reaching out to Citi.

Wachovia shares skyrocketed $1.10, or 30.6%, to $4.70 in recent trading. Citi shares were up 5.7% and Wells Fargo shares were down fractionally.

"Without our willingness to engage in this transaction, hundreds of billions of dollars of value would have been seriously threatened," Citi said in a statement. "We stood by while others walked away. Now, our shareholders have been unjustly and illegally deprived of the opportunity the transaction created."

Some analysts had said Citi should walk away from the deal soon after Wells Fargo trumped it.

The news comes on a day when the stock market lost more than 7% of its value. Investors seem to fear the worst for the U.S. financial sector and the implications for the broader economy.

CEO Vikram Pandit said Citi will apply the same "discipline" it used in the Wachovia deal to future deals. It will also "redouble" its focus on capital and risk management, as well as controlling expenses, Pandit said in a statement.

A Wachovia spokeswoman did not immediately respond to a request for comment.

In a statement Thursday, Wells Chairman Dick Kovacevich said the merger is "simply an incredible fit that will result in an immensely strong, stable financial services company."

He said Wells and Wachovia have a "firm, binding merger agreement," and that he is confident the merger will be completed.

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