Judge sets hearing on Citi, Wachovia deal

NEW YORK (Reuters) - A district court judge set a court hearing for Tuesday to decide whether an exclusivity agreement in Citigroup Inc's bid to buy Wachovia Corp's banking assets prevents a competing deal by Wells Fargo to go forward.

Citigroup announced on Monday it had agreed to buy Wachovia's banking operations in a deal backed by the U.S. government. But in a surprise move on Friday, Wells Fargo said it had signed an agreement to buy the whole of Wachovia, upstaging Citigroup's government-backed bid.

To thwart the Wells Fargo deal, Citigroup said late on Saturday it had won a court order blocking Wells Fargo from buying Wachovia until the court ruled otherwise.

Separately, a person familiar with the matter said Citigroup is seeking $60 billion in punitive and compensatory damages against Wells Fargo for interfering with the deal.

Wachovia and Wells Fargo said on Sunday that the court ruling did not block their proposed deal.

Citigroup and Wells Fargo are battling for the sixth-largest U.S. bank, which has suffered losses in the credit crisis but has a large and desirable network of bank branches.

Wachovia asked the court for a temporary restraining order that would have prevented Citigroup from doing anything that interferes with the Wells Fargo deal.

U.S. District Court Judge John Koeltl denied the request, but he said the court will hear on Tuesday whether or not the letter agreement that Citigroup is arguing prevented Wells Fargo from making the bid for Wachovia is enforceable.

"What is critical is Citicorp cannot use the letter agreement to prevent Wachovia from considering the far superior proposal offered by Wells Fargo," said Wachovia's lawyer, David Boies, referring to Citigroup.

But Citigroup argued in court the letter precluded Wells Fargo from making an offer.

"We entered into a term sheet and exclusivity agreement (with Wachovia) in order to prevent Wachovia from failing," said Citigroup lawyer Michael Helfer.

Meanwhile, Wachovia headed to a New York state appeals court late on Sunday to try to reverse the injunction granted last night to Citigroup.

(Reporting by Dan Wilchins, Nicole Maestri and Mike Erman; Editing by Kenneth Barry)