UPDATE 2-S&P upgrades Wachovia; Citi, Wells Fargo on review

(Adds Moody's action)

NEW YORK, Oct 10 (Reuters) - Standard & Poor's on Friday upgraded Wachovia Corp's WB.N credit rating and Moody's said it may raise its rating after Citigroup abandoned its battle to acquire the bank, clearing the way for Wells Fargo to push ahead with its plans.

Separately, S&P placed Citigroup on review for a possible downgrade, while Moody's placed Wells Fargo's rating on negative watch.

S&P raised Wachovia's rating a full five notches to "A-plus," or the fifth-highest investment grade, from "BBB-minus," or just one notch above speculative grade.

Moody's said it may raise the bank's long-term debt rating from "A1," the fifth highest investment grade. It also raised Wachovia's preferred stock rating three notches to "A3," the seventh highest investment grade, from "Ba3."

The agency said it is revising its outlook on the rating to "positive" from "developing," meaning it could upgrade again within two years.

S&P said it is keeping Wells Fargo (WFC.N) on review for a possible downgrade where it was first placed on Oct. 3.

S&P said a Wells Fargo takeover of Wachovia would be a positive, noting that it has the approval of both management boards.

"We believe that this acquisition would greatly enhance the geographic span of Wells Fargo's banking franchise," analyst Victoria Wagner said in a note. "Wells Fargo would emerge as the nation's largest core deposit banking institution."

Citigroup (C.N) late Thursday said it was backing away from talks with Wells Fargo over Wachovia WB.N.

Citigroup had agreed last week to buy Wachovia's banking assets for about $2.2 billion with partial government support. But days later, Wells Fargo upset that deal by negotiating a separate agreement to buy all of Wachovia for about $15 billion and no government backing.

Citigroup has promised legal action against Wells Fargo and Wachovia. For more, see [ID:nBNG395254].

If the transaction goes through as planned, S&P may raise ratings on Wachovia and its banking units to match them to its ratings on Wells Fargo.

Meanwhile, Wells Fargo's ratings remain on watch to reflect uncertainty about earnings and capital levels after the deal closes.

S&P said it is keeping Citigroup ratings on review for a possible downgrade despite the failure of its Wachovia deal. The agency said the review reflects concerns about the bank's exposure to further write-downs on assets that have been disrupted in the recent turmoil and risk in its consumer loan portfolio in the United States.

Meanwhile, Moody's said it is placing Wells Fargo ratings on review for a possible downgrade, citing integration risk related to the deal and risks stemming from the weak economic environment. The agency rates Wells Fargo senior debt "Aa1", or second-highest investment grade. (Reporting by Ciara Linnane; Additional reporting by Karen Brettell; Editing by Leslie Adler)