In the latest twist on Wall Street, Citigroup acquired the bulk of Wachovia's banking operations for $2.1 billion in stock in a deal that was encouraged by the government.

The transaction will make Citigroup (C) the largest U.S. deposit institution and will drastically change the structure of Wachovia (WB), one of the nation's leading banks. 

The Federal Deposit Insurance Corp. said Wachovia “did not fail" and depositors will be fully protected. Shares of Wachovia plummeted more than 90% in pre-market action before trading was halted. Citi's shares were down about 1%, outperforming the broader market. 

The FDIC stepped in to help Wachovia find a suitor in an effort to help prevent yet another blow to the nation's rapidly-changing financial system.  

The FDIC, which consulted with President Bush and Treasury Secretary Henry Paulson, helped broker the deal by agreeing to share in future Wachovia loan losses.

“This action was necessary to maintain confidence in the banking industry given current financial market conditions,” FDIC Chairwoman Shelia Bair said in a statement. “On the whole, the commercial banking system in the United States remains well capitalized." 

Wachovia will remain a public company and hold onto Wachovia Securities, the brokerage that includes AG Edwards. Wachovia will also keep Evergreen, its asset-management division. Citigroup said Wachovia's headquarters will remain in Charlotte, North Carolina. 

Citigroup agreed to pay what amounts to about $1 per share for Wachovia, acquiring most of the bank's assets and liabilities, including $53 billion in Wachovia debt. 

"This is a historic day and this is a historic transaction. It’s great for our clients and customers and it’s great for the U.S. financial system," Citigroup CEO Vikram Pandit said on a conference call Monday. 

The deal comes after Wachovia failed to reach a transaction with a number of suitors, reportedly including Wells Fargo (WFC).

Citi granted the FDIC $12 billion in preferred stock and warrants. In turn, Citi absorbed $42 billion in Wachovia’s losses from a pool of $312 billion of loans. 

As with last week’s intervention in Washington Mutual (WM), which was the largest banking failure in U.S. history, the FDIC said its deposit insurance fund won’t be impacted from the deal.

Paulson and Federal Reserve Chairman Ben Bernanke issued statements that backed the Wachovia deal. 

"In this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy," said Paulson. 

Bernanke applauded the FDIC's "timely actions," saying they show "our government's unwavering commitment to financial and economic stability," said Bernanke. 

Meanwhile, Citigroup said it will pay for the transaction by cutting its dividend to 16 cents from 40 cents and raising $10 billion in common equity. 

Citi said it sees an estimated $3 billion in annualized expense synergies by year three as a result of overlapping functions. Less than 5% of Wachovia's branches are expected to be closed. 

The deal will allow Citi to create a U.S. retail bank with 9.8% of the domestic market's deposits and $1.3 trillion of global deposits.  

The demise of Wachovia comes near the end of a historic month on Wall Street during which the nation’s financial landscape has been dramatically altered.

Over the past four weeks, the government nationalized mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), allowed investment bank Lehman Brothers (LEH) to file for bankruptcy protection, gave insurance giant American International Group (AIG) an emergency $85 billion loan and seized WaMu.

Also, banking giant Merrill Lynch (MER) sold itself to Bank of America (BAC) and Goldman Sachs (GS) and Morgan Stanley (MS) converted into commercial banks.

Like many of its peers, Wachovia suffered massive losses related to bad bets in the housing market. Wachovia wasn't able to recover from the mortgages it inherited in the 2006 purchase of Golden West Financial.