Wells Fargo (WFC) and Citigroup (C) were wrestling on Sunday night to resolve a dispute over who gets the rights to what assets of Wachovia (WB), as the federal government applied pressure to resolve the situation, according to The Wall Street Journal.

The Journal said that the discussions could result in splitting up Wachovia between the two rivals, with Citigroup getting Wachovia's branches in the Northeast and mid-Atlantic, and Wells Fargo getting the branches in the Southeast and California as well as the asset-management and brokerage units, citing people familiar with the talks.

The Journal's report further said that the plans being discussed don't involve the federal government being on the hook for any Wachovia liabilities -- and that Wachovia itself has been excluded from the talks in hopes of reaching a solution more quickly.

This dispute arose because last Monday, Citigroup had in a government-brokered deal offered to take over Wachovia's banking assets. But later in the week, Wells Fargo stepped in with an offer to buy Wachovia outright, which appeared to leave U.S. taxpayers off the hook. 

The all-stock deal would have given Wachovia shareholders 0.1991 share of Wells Fargo common stock in exchange for each share of Wachovia.

Wells Fargo said it would acquire all of Wachovia’s businesses and obligations, including its preferred equity, indebtedness and banking deposits. Boards of both Wells Fargo and Wachovia signed off on the deal.

In a statement that confirmed a Friday report on FOX Business Network, Citigroup asserted its exclusive rights to certain Wachovia assets.

Click here to read the exclusivity document

The statement referred to the Wells Fargo proposal as a "clear breach" of Citigroup's earlier government-brokered deal
Citigroup said it had nearly completed the definitive agreements needed to finish the deal and demanded that Wells Fargo and Wachovia terminate any transaction.

To help pay for the deal, Wells Fargo said it plans to raise $20 billion in a common stock offering. Citi had also announced a capital raise -- $10 billion -- and planned to slash its dividend to 16 cents, likely due in part to its planned integration of Wachovia.

The Journal said that the weekend negotiations between Citi and Wells Fargo were being led by senior Federal Reserve officials, with help from the Treasury Department. A person familiar with the matter told the Journal that Treasury Secretary Henry Paulson had recused himself personally from the talks because of his ties to Wachovia CEO Robert Steel, who was a top Treasury official before taking his position at Wachovia in July.

A quick resolution of this matter would likely be the most pleasing option for federal officials, who are doing everything from this $700 billion economic-rescue package to Federal Reserve liquidity injections in their efforts to keep the economy from entering freefall. If the fight for Wachovia can't be resolved here, it could take months or years of court battles to find a resolution, just as the financial-services industry is in its most fragile state in decades.