We're one step closer to Wellschovia Fargo and one step further from Citichovia.

Citigroup and Wells Fargo were unable reach an agreement to amicably split up Wachovia's assets, according to a statement from Citigroup. The litigation between the two parties was put on hold for several days while they tried to hammer out some kind of resolution. Those talks are now over.

Citigroup stands by its original offer to buy part of Wachovia for $2.1 billion with backing from the F.D.I.C., but it will not seek to block Wells Fargo in court from proceeding with its $15 billion offer for the entire ailing bank.

But this deal will still have its day in court. Citigroup indicated it will continue to seek damages from all parties involved.

"Without our willingness to engage in this transaction, hundreds of billions of dollars of value would have been seriously threatened. We stood by while others walked away. Now, our shareholders have been unjustly and illegally deprived of the opportunity the transaction created."

This is a blow to Citigroup, which was looking forward to adding Wachovia's extensive retail banking operations to its own branch count, giving it a wider footprint, especially in the Southeast. It would have added a significant number of deposits to its balance sheet.

Still, Citigroup insisted it never wanted Wachovia, but that it agreed to step up and take it in order to avoid systemic financial risk to the already fragile system. After it was blindsided by Wells Fargo's offer, however, it appeared willing to fight to the end for the bank it claimed it didn't want.  

But what exactly this means for Wells Fargo is unclear. In recent days, reports surfaced that both Wells and Citi, in poring over Wachovia's books during negotiations, found assets that were in worse condition than either originally believed. As it stands, the Wells Fargo deal comes without any guarantees from the government.

Will Wells continue with its $6.88 per share bid for Wachovia? Investors sure hope so. In after-hours trading, shares of Wachovia surged more than 30 percent, to $4.50.

That's still a far cry from $6.88, but tomorrow's another day.

(Update: Yes, Wells Fargo will go ahead with its original offer)