The state of California pulled out of multi-state mortgage negotiations with large U.S. banks, dealing a sharp blow to long-running efforts to secure a broad settlement over allegations of lending abuses.

California Attorney General Kamala Harris told fellow government officials running the talks that the deal under discussion failed to provide enough relief for her state's homeowners and released the banks from too many claims.

The full impact of her decision, announced in a letter on Friday, is unclear, but a person close to the negotiations said the loss of California would not derail the talks. The banks and the rest of the negotiating team will meet in Washington D.C. next week as scheduled, this person said.

Banks are seeking legal immunity beyond the accusations of wrongful foreclosures and mortgage servicing errors to include errors in originating home loans and packaging them for investors, sources familiar with the talks have said.

The banks have been negotiating for months with the states and the federal departments of Justice, and Housing and Urban Development. The financial firms would prefer that as many states as possible sign on to any agreement, particularly states with large numbers of foreclosures, such as California.

California was being asked for a broader release of claims than we can accept and... the relief contemplated would allow too few California homeowners to stay in their homes, Harris said in her letter.

New York had left the talks in August over a disagreement about how much legal immunity the banks should receive in any settlement.

A spokeswoman for the Justice Department said discussions are ongoing, and federal officials continue to work with states, including California.

State and federal officials have discussed penalties totaling roughly $20 billion from institutions that include Bank of America Corp, JPMorgan Chase & Co, Wells Fargo, and Citigroup.

The banks are accused of dealing with the deluge of mortgage defaults that began in 2008 by cutting legal corners and unlawfully rushing through foreclosure paperwork, pushing people out of homes they might otherwise have stayed in.

Representatives of the banks met with Harris last week in an attempt to keep California on board.

The state has faced some of the worst default rates in the country, with an unemployment rate of 12.1 percent and two million residents who owe more on their mortgage than their home is worth.

Eight of the 10 hardest hit U.S. cities in terms of foreclosure rates are in California, Harris said.

Jason Ware, equity analyst at Salt Lake City-based Albion Financial Group, said California's decision adds to uncertainty about the banks' ultimate liability for the mortgage mess.

I'd rather just see one big battle they'd have to fight than all these smaller skirmishes. It's a difficult stock group to own right now, because of all the uncertainties.

Evidence of the foreclosure shortcuts burst into public view about a year ago. Bank stocks, as measured by the KBW banks index, have declined roughly 30 percent so far this year.

Harris has been under pressure from activist groups to stake out a hard-line position similar to New York. She did not mention New York in her letter.

A spokesman for New York Office of the Attorney General said it looks forward to working with California and others to hold accountable those responsible for the mortgage crisis and provide homeowners with meaningful relief.