This week’s frantic selling of Citi has that panicky feel to it. At least one bond market analyst has switched from warnings of recession to uttering the D word, and the whole financial sector is sliding in Citi’s wake. With only a couple months left in his term as Treasury secretary, and having just been grilled on Capitol Hill, it wouldn’t have been a surprise for Hank Paulson to get all fiery and combative about where the U.S. economy is headed and what he is going to do about it.

Speaking at the Ronald Reagan Library, Paulson looked backward, defending the decision to let Lehman Bros fail. He said it “naive” for critics to argue that letting Lehman fail paved the way for AIG and Washington Mutual to falter. In the case of Citi, which is widely considered too big to fail, he was mum, except to say that nobody should be so big.

“The steps that we’ve taken have been pretty strong … we understand how important the stability of our financial system is, and stability is our top priority here,” the chief of the Treasury said in response to a question about Citigroup. But he added: “I can’t comment on any one institution.”

Citigroup has lost more than half of its share value this month and was the top decliner among large U.S. banks yesterday. But other banks including JPMorgan and Bank of America also had large share losses.

Though Paulson said he was confident his tool box now has the right set of hammers and wrenches (and admitting it was poorly stocked when Lehman broke), there seems little to take from his comments to give a Citi investor, even a Saudi prince, much cause to be confident.

Deals of the day:

* The banking merger between the Dutch retail operations of Fortis and ABN AMRO will no longer take place, the Dutch Finance Ministry has decided, a Dutch newspaper reported.

* Spanish bank La Caixa said it had talked to Russia’s Lukoil about selling its stake in oil major Repsol but it said any sale hinged on Repsol’s biggest shareholder, builder Sacyr.

* French defence groups Thales and Safran are in talks to swap some assets to cut duplication, Les Echos newspaper said.

* Indonesia’s deposit guarantee agency has taken over Bank Century to increase the bank’s quality, Central Bank Governor Boediono said.

* A New Zealand local council is looking to increase its majority stake in Lyttelton Port Company, offering to buy an extra 2.48 percent of the port on market at a 22 percent premium, the council said.

(Photo by Lucy Nicholson/Reuters)