However, Citigroup and the FDIC objected to the deal.
Federal Deposit Insurance Corp. Chairman Sheila Bair said the agency "stands behind its previously announced agreement with Citigroup."
Citigroup on Friday demanded Wachovia call off the deal, saying it has an exclusive deal to buy Wachovia's banking operations.
The FDIC will review all proposals and work with the regulators of Wachovia, Citigroup and Wells Fargo "to pursue a resolution that serves the public interest," Bair said.
Under the earlier $2.1 billion deal, Citigroup agreed to absorb as much as $42 billion in losses from Wachovia's $312 billion loan portfolio. The FDIC agreed to cover losses above that level.
"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Robert Steel, Wachovia's president and chief executive, said in a statement.
The Wachovia-Wells deal, announced Friday, comes in a turbulent time for banks and financial firms as they grapple with the ongoing credit crisis, which led to the recent bankruptcy of Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc.
Wachovia shareholders will receive 0.1991 shares of Wells Fargo for every share of Charlotte, N.C.-based Wachovia stock they own, valuing Wachovia at about $7 per share. This is a nearly 80 percent premium over the stock's Thursday closing price of $3.91.
Shares closed at $10 last Friday, the last trading session before the deal with Citigroupwas announced.
The board approved Wells Fargo's offer late Thursday. The deal is still subject to Wachovia shareholder and other regulatory approvals. Wells Fargo said it expects the deal to close by year-end.
"It provides superior value compared to the previous offer to acquire only the banking operations of the company and because Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world's great financial services companies," said Wells Fargo Chairman Dick Kovacevich.
San Francisco-based Wells Fargo will record merger and integration charges of about $10 billion, but says it expects earnings to be boosted within the first year after the acquisition closes. No government assistance is part of the deal terms.
Additionally, Wells Fargo plans to issue up to $20 billion of stock, primarily common stock, to maintain a strong capital position.
Charlotte will be the headquarters for the combined company's East Coast retail and commercial and corporate banking business. St. Louis will remain the headquarters of Wachovia Securities.
Additionally, three members of the Wachovia board will join the Wells Fargo board when the transaction is completed.
The combined company will have total deposits of $787 billion and assets of $1.42 trillion, more than doubling Wells Fargo's totals on both counts. The bank will operate more than 10,000 locations. The two banks currently employ a combined 280,000 people.
On Monday, Citigroup agreed to buy Wachovia's banking operations for $2.16 billion in a deal orchestrated by the federal government. That deal, which had been approved by the boards of both companies, was still subject to approval by Wachovia's shareholders and regulators. It is not clear whether Citigroup will have to pay a break-up fee.
In addition to assuming $53 billion worth of debt, Citigroup had agreed to absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio. The FDIC agreed to cover any remaining losses in exchange for $12 billion in Citigroup preferred stock and warrants.
But the failure of the government's proposed $700 billion bailout for financial institutions Monday afternoon cast doubt on whether Citigroup would be able to rid itself of some of Wachovia's bad debt.
While the proposal would have prevented most banks from profiting on the sale of troubled assets to the government, an exception would have been made for assets acquired in a merger or buyout.
That would have allowed Citigroup to sell Wachovia's distressed mortgage-related assets to the government for a profit.
A revised version of the bailout plan was passed on Wednesday by the Senate and goes up for a House vote on Friday. The plan still centers on enabling the government to spend billions of dollars to buy bad mortgage-related securities and other devalued assets from troubled financial institutions.