CHARLOTTE - Wachovia Corp. has begun preliminary merger talks with Banco Santander SA of Spain, Wells Fargo & Co. of San Francisco and Citigroup Inc. of New York, The Wall Street Journal and The New York Times reported Friday, citing people familiar with the matter.

The report came on a day in which Wachovia shares fell 27 percent, or $3.70, to $10. The plunge came after Seattle-based thrift Washington Mutual failed and was acquired by JPMorgan Chase & Co. and as Congress weighed a bailout plan for the financial industry.

Wachovia said it doesn't comment on merger speculation. The Journal said that Wachovia executives are exploring alternatives but aren't in a rush to conduct a deal.

Earlier in the day, the bank worked to stress the company's soundness, amid the sharp fall in its shares. Spokeswoman Christy Phillips-Brown said the bank had a "strong and stable deposit base" and had added 745,000 checking accounts since June. That contrasted with WaMu, which the Office of Thrift Supervision said shed $17 billion in deposits since Sept. 15.

Wachovia chief executive Bob Steel posted a message on the bank's Web site Friday that said management "is watching these events carefully and must plan and remain flexible," adding "we are strategically protecting and managing liquidity and capital in this challenging environment."

Steel, as he has done since taking the job in July, also highlighted the company's strong customer service, retail banking franchise, large brokerage operation in affluent markets and corporate banking expertise.

"Our core franchises are extremely valuable and continue to operate well relative to our competition," Steel said.

He also said Wachovia remains optimistic that leaders in Washington "will provide comfort to the markets with a plan to stabilize the housing and short-term funding markets."

Investors may be sending Wachovia's shares lower because they are worried that the government's $700 billion bailout will be tabled. If that's the case, Wachovia will seem "a lot more vulnerable," said James Early, an analyst at The Motley Fool.

"A lot of it depends on political moves, and that's a very hard thing -- to figure out what the government is going to do," Early said.

Saddled with mortgage losses from its 2006 Golden West Financial acquisition, Wachovia has been perceived as one of the nation's more troubled financial institutions.

But in recent months, Steel has been taking steps to cut costs, shed troubled loans and preserve capital. He investigated a merger with investment bank Morgan Stanley & Co., but those talks apparently broke off this week.

Washington Mutual was battered by mortgage-related losses and then a run on its deposits, leading to a deal facilitated by the Federal Deposit Insurance Corp.

WaMu had been a subprime lender and the second-biggest provider of exotic option adjustable rate mortgages, with a $55.9 billion portfolio as of the first quarter of this year, according to Inside Mortgage Finance.

JPMorgan said it was buying WaMu's deposits and most of its assets in a transaction that protects the thrift's customers from losing their deposits.

Wachovia has the biggest option ARM portfolio, at $122 billion. The Charlotte bank is treating the loan book as a "distressed asset" separate from the bank and working to refinance customers into more traditional loans.

Overall, financial stocks had a mixed day, with shares of banks such as JPMorgan and Bank of America Corp. in positive territory while others have taken steep drops. Cleveland-based National City Corp. is down about 25 percent.

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