UPDATE 5-Citigroup to acquire Wachovia banking operations

(Adds regional banks' shares falling, recasts lead, quote)

By Christopher Kaufman

NEW YORK, Sept 29 (Reuters) - Citigroup Inc (C.N) said on Monday it would buy the banking operations of Wachovia Corp WB.N in U.S.-brokered deal that U.S. Federal Reserve Chairman Ben Bernanke said would help bring financial stability.

Citi shares jumped 4.6 percent, but investors punished regional banking stocks.

The Citi-Wachovia deal, brokered by the Federal Deposit Insurance Corp (FDIC), came as authorities stepped in to rescue three European banks and U.S. lawmakers prepared to vote on a $700 billion U.S. financial bailout.

Bernanke said in a statement that the FDIC action "demonstrates our government's unwavering commitment to financial and economic stability."

Investors dumped shares of regional banks, wondering which regional bank might need a merger partner next. National City Corp NCC.N slid $1.72, or 46 percent, to $1.99 on the New York Stock Exchange. The big Ohio bank issued a statement saying it had no need or plan to raise additional capital.

The closely watched S&P Financial index .GSPF fell 4.5 percent, with Fifth Third Bancorp (FITB.O) -- another Ohio-based bank -- dropping 30 percent.

Under the Wachovia deal, struck in consultation with the Federal Reserve, the Treasury and President George W. Bush, Wachovia depositors will be fully protected, and no cost is expected for the Deposit Insurance Fund, the FDIC said.

"Wachovia did not fail; rather, it is to be acquired by Citigroup Inc on an open bank basis with assistance from the FDIC," the FDIC said on its website.

Shares of Wachovia tumbled more than 90 percent in premarket trading to below $1 per share, and the stock was halted during the regular session.

Citi shares rose 95 cents to $21.10 on the New York Stock Exchange.

RISK FOR CITI

Citi said in a statement it would pay about $2.16 billion in stock for Wachovia, including its roughly $53 billion of Wachovia debt. It will get more than $700 billion in banking assets, and related liabilities.

On a conference call, Citi Chief Executive Vikram Pandit said the bank would assume just over $100 billion of Wachovia debt in aggregate. He added that Citi has no strategic need to be in the asset management business.

To help pay the bill, Citi said it will raise $10 billion in common equity, and slash its quarterly dividend to 16 cents per share from 40 cents, effective immediately.