Dexia SA may be left with the lender's worst assets under plans that would allow the French and Belgian governments to avoid injecting more capital into the bank, two people with knowledge of the talks said.

Under the option most favored by the French, the two governments would guarantee Dexia's borrowings before splitting up the lender, said the people, who declined to be identified because the talks are private.

Belgium may then assume Dexia's assets in that country, while France's state-owned La Banque Postale and Caisse des Depots et Consignations would buy Dexia's French municipal lending unit, leaving Dexia as the "bad bank," the people said.

That would avoid an immediate recapitalization of the Belgian municipal lender, which would then sell its legacy assets over time, the people said.

If the lender transferred its "bad" assets to a new company, the bank would need more capital because a sale would crystallize what are at the moment paper losses for Dexia, one of the people said.

A final decision hasn't been made and the talks were continuing, the people said.

Dexia's breakup, three months after it got a clean bill of health in European Union regulators' stress tests, transplants Europe's banking crisis from the continent's periphery to its heartland. The Brussels- and Paris-based bank, which received a bailout in 2008, is being rescued again after its short-term funding evaporated as Europe's sovereign debt crisis worsened.

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