NEW YORK — Citigroup agreed today to purchase Wachovia's banking operations for $2.1 billion in a deal arranged by federal regulators, making the Charlotte-based bank the latest casualty of the widening global financial crisis.

The deal greatly expands Citigroup's retail franchise — giving it a total of more than 4,300 U.S. branches and $600 billion in deposits — and secures its place among the U.S. banking industry's Big Three, along with Bank of America Corp. and JPMorgan Chase & Co.

But it comes at a cost: Citigroup Inc. said it will slash its quarterly dividend in half to 16 cents. It also will dilute existing shareholders by selling $10 billion in common stock to shore up its capital position.

In addition to assuming $53 billion worth of debt, Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the Federal Deposit Insurance Corp. agreeing to cover any remaining losses. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.

The remainder of Wachovia will include its asset management, retail brokerage and certain select parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises. It will continue to be a public company under the Wachovia name.

The agreement comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia Corp., which was weighed down by losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp.

Wachovia, like Washington Mutual Inc., which was seized by the federal government last week, was a big originator of option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.

Wachovia shares, which had slumped as the global credit crisis intensified in recent months, dropped $8.20, or 82 percent, to $1.80 as trading resumed Monday afternoon. They had traded as high as $52.25 over the past year.

The FDIC asserted Monday that Wachovia did not fail, and that all depositors are protected and there will be no immediate cost to the Deposit Insurance Fund.

Federal Reserve Chairman Ben Bernanke, in a statement Monday, said he supports the "timely actions" taken by the FDIC "which demonstrate our government's unwavering commitment to financial and economic stability."

Treasury Secretary Henry Paulson said in a statement that the sale of Wachovia's banking operations to Citigroup would "mitigate potential market disruptions." Paulson said he agreed with the FDIC and the Fed that a "failure of Wachovia would have posed a systemic risk" to the nation's financial system.

The deal is essentially a vote of confidence in Citigroup's capital strength, said Sandler O'Neill & Partners analyst Jeff Harte in a note to investors. "We are skeptical that the FDIC would have brokered a deal to sell Wachovia's assets and liabilities into weak hands," he said.

With the acquisition of the bulk of Wachovia, Citigroup has reclaimed its title as the biggest U.S. bank by total assets — $2.91 trillion. In terms of how shareholders value each company's stock, Bank of America Corp. remains the largest U.S. bank, followed by JPMorgan Chase in second and Citigroup in third place.

Wachovia's takeover marks a dramatic shift in the outlook for Citigroup's future. Just a short time ago, the bank's investors worried about the possibility of its own collapse given its massive exposure to mortgage-backed securities. New York-based Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the largest reduction in asset values taken by any U.S. bank in the current credit crisis.

Citigroup said it expects to reduce expenses by more than $3 billion annually as it consolidates certain functions. But with few overlaps in their regional operations, Citi projects closing fewer than 5 percent of the banks' combined branches.

During a conference call with investors, Citigroup CEO Vikram Pandit said he is working with Wachovia CEO Bob Steel in setting up a transition team. "We will make sure that we execute on this with a great deal of precision and a great deal of speed," he said.

The failure of the government's proposed $700 billion rescue plan for financial institutions casts doubt on whether Citigroup will be able to rid itself of some of Wachovia's bad debt. Some expected the bank to take advantage of the plan and potentially sell toxic mortgages and other assets it gained from Wachovia for a higher price than the bank actually paid for them.

But House lawmakers voted down the bailout proposal on Monday afternoon.

The transaction, which has been approved by the boards of both companies, is subject to approval by Wachovia's shareholders and regulators and must close by Dec. 31.

The Wachovia acquisition caps a wave of unprecedented upheaval in the financial sector in the past six months that has redefined the banking industry, starting with the government-led forced sale of Bear Stearns Cos. to JPMorgan in March.

The failure of IndyMac Bancorp in July reignited investors' fears about the stability of the financial sector, which led to the eventual takeover of struggling mortgage lenders Fannie Mae and Freddie Mac. Earlier this month, officials seized both Fannie and Freddie, temporarily putting them in a government conservatorship, replacing their chief executives and taking a financial stake in the mortgage finance companies.

After U.S. regulators made it clear that they would not bail out struggling investment bank Lehman Brothers Holdings Inc., rival Merrill Lynch & Co. arranged a hasty deal to be bought by Bank of America Corp. for $50 billion in stock.

Lehman Brothers was subsequently forced to declare bankruptcy, the largest ever in the United States. Investor concerns quickly turned to American International Group Inc., the nation's largest insurer. Staving off a failure that could have sent shock waves throughout the global markets, the federal government injected an $85 billion emergency loan into the insurer.

Just days later, the government seized Seattle-based Washington Mutual, marking the largest bank failure in U.S. history. WaMu's deposits and assets were acquired by JPMorgan for just $1.9 billion.

These events have now culminated in extraordinary moves by the federal government to try to fix the financial crisis that began more than a year ago.

Wachovia's problems stem largely from its acquisition of Golden West Financial in 2006 for roughly $25 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.

This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs — mostly in its mortgage business — and slashed its dividend. Wachovia also boosted its provision for loan losses to $5.57 billion during the second quarter, up from $179 million in the year-ago period.