The talks over carving up Wachovia (WB) have reportedly hit more snags as its two potential suitors have grown gun-shy over the banks’ low-quality assets and possible trouble in raising the billions of dollars necessary to pay for the transaction.

Citigroup (C) and Wells Fargo (WFC) have yet to reach a settlement outside the courtroom in how they will divvy up Wachovia’s assets, deposits and loans. A ceasefire in lawsuits between the two banks is set to expire Friday morning.

Citi and Wells Fargo were surprised by the concentration of low-quality assets on Wachovia’s books, leading them to worry they will be left with steeper-than-expected losses from acquiring part of Wachovia, The Wall Street Journal reported on Thursday.

However, sources inside Citigroup tell FOX Business's Alexis Glick that Citi is not surprised by the level of assets on Wachovia's books as they sought assistance from the Federal Deposit Insurance Corp. in the deal for this very reason. Right now, all options remain on the table at Citi as they continue a dialogue with Wells Fargo. 

The banks have also been spooked by the lukewarm response to Bank of America’s (BAC) sale of $10 billion in common stock earlier this week, the newspaper reported. Both Citi and Wells Fargo plan to raise significant amounts of capital to pay for a potential deal.

Citi and Wells Fargo have also failed to reach a compromise over who will control Wachovia’s computer system, the newspaper reported.

The drama surrounding the future of Wachovia began nearly two weeks ago, when Citigroup announced a government-assisted deal to acquire Wachovia’s banking operations. Citi has since said the deal helped save Wachovia from what would have been the nation’s largest banking failure ever.

Days later, Wells Fargo announced it had reached a deal to acquire all of Wachovia without any government assistance.

Citi then filed suit against Wells Fargo and Wachovia and sought $60 billion in damages, claiming the new offer violated an exclusivity agreement.

The Federal Reserve and the Treasury Department have pushed Wells Fargo and Citigroup to reach a settlement with each other rather than allow Wachovia’s future be hung up in a potentially drawn-out court battle.