Wells Fargo & Co. (WFC) Friday agreed to buy all of Wachovia Corp. (WB) for about $15 billion in stock, however, Citigroup Inc. (C), which had already agreed to buy Wachovia’s banking operations, immediately issued a protest that could jeopardize the deal.

“Citi has substantial legal rights regarding Wachovia and this transaction,” Citi said in a statement. “Wachovia’s agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia.”

Wells Fargo’s $15 billion, or $7 a share, all-in bid easily trumps Citigroup’s $2.16 billion, or $1 per share, offer for Wachovia’s deposits, loan portfolio, and retail banking branches. The Citigroup offer did not include Wachovia’s A.G. Edwards brokerage unit or Evergreen mutual fund family.

“It provides superior value compared to the previous offer to acquire only the banking operations of the company,” Wells Fargo Chairman Richard Kovacevich said in defense of his company’s offer. “Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world’s great financial services companies.”

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Wells Fargo said that it not only intends to keep Wachovia in tact, but also requires no assistance from the Federal Deposit Insurance Corp. (FDIC). That runs contrary to Citi’s offer, which relied heavily on the FDIC for financing.

“The FDIC stands behind its previously announced agreement with Citigroup,” said FDIC Chairman Sheila Bair. “The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest.”

The Federal Reserve and Office of the Comptroller said that Citigroup’s proposal has already been reviewed and approved, but that regulators would work with all of the parties involved “to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.”

Wells Fargo’s action could lead to a standoff with federal regulators, or possibly a bidding war. Citigroup has the option of either taking legal action to block the deal, or increasing its offer.

“If Citigroup is serious, they should boost their bid and become a more competitive buyer, rather than whining,” Sean Egan, managing director of Egan-Jones Ratings Co., told Bloomberg. “It should be easy for Wells Fargo to compensate Citigroup if they decide that’s the right course.”

The addition of Wachovia’s 3,300 retail-banking branches and $2.2 billion in deposits would make Citi the third-biggest U.S. bank network and solidify its status as the nation’s largest lender by assets. The acquisition would also provide Citi with a cheap, stable source of funding at a time when credit is scarce.

If Citi wins the bidding war for Wachovia, it will have $2.91 trillion, more than $600 billion in deposits, and 4,300 U.S. bank offices in 21 states.

However, should Wells Fargo come out ahead, it will have $1.42 trillion in assets, $787 billion in deposits, and 10,761 branches in 39 states.

Whichever bank takes over Wachovia’s loan portfolio will inherit roughly $122 billion in adjustable-rate mortgages, the majority of which were distributed to subprime borrowers and are likely to default.

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