UPDATE 1-Judge rejects Citigroup claim over Wells-Wachovia

* Wachovia not bound by Citigroup takeover

* FDIC has broad power in takeovers of troubled banks

* Citigroup to appeal ruling

By Jonathan Stempel

NEW YORK, July 15 (Reuters) - A federal judge has rejected Citigroup Inc's (C.N) argument that Wachovia Corp lacked power to accept a takeover by Wells Fargo & Co (WFC.N), derailing Citi's acquisition bid.

In a ruling dated Monday, Judge Shira Scheindlin concluded that Citigroup lost an exclusive right to deal with Wachovia when the federal Emergency Economic Stabilization Act became law last Oct. 3, the same day Wells Fargo announced its takeover of Wachovia. That law also authorized the $700 billion bank bailout fund known as the Troubled Asset Relief Program.

While New York-based Citigroup abandoned its lawsuit to block the merger, it is still seeking damages. "With all respect to the district judge, we are disappointed by this ruling and look forward to the vindication of our legal position on appeal," spokesman Stephen Cohen said.

Citigroup had on Sept. 29 agreed to buy much of Charlotte, North Carolina-based Wachovia for $2.16 billion, with the Federal Deposit Insurance Corp sharing in losses on Wachovia loans. The subsequent higher offer by San Francisco-based Wells Fargo for all of Wachovia did not require FDIC support.

In its complaint, Citigroup said it would be improper to allow a non-FDIC supervised transaction such as Wells Fargo's to interfere with an FDIC-supervised one such as its own.

Citigroup and Wachovia had entered an agreement barring the latter from soliciting other buyers before Oct. 6.

The judge, however, said that the law was designed to address an "alarming banking crisis," and give the FDIC "full flexibility to rescue troubled banks" through a "broad range of actions."

She said this included a competitive sale of Wachovia, which had been suffering from soaring mortgage losses and billions of dollars of deposit outflows.

The judge noted that the law came after a turbulent month when the government seized Fannie Mae (FNM.N) and Freddie Mac (FRE.N), Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt, Merrill Lynch & Co agreed to be bought by Bank of America Corp (BAC.N), American International Group Inc (AIG.N) got a federal bailout, and Washington Mutual Inc (WAMUQ.PK) failed.

Wells Fargo completed its $12.5 billion takeover of Wachovia on Dec. 31, creating the fourth-largest U.S. bank.

The case is Wachovia Corp v. Citigroup Inc, U.S. District Court, Southern District of New York (Manhattan), No. 08-8503. (Reporting by Jonathan Stempel; Editing by Tim Dobbyn)