NEW YORK - Wells Fargo & Co shares fell on Wednesday to their lowest level in almost 12 years before recovering amid fears the fourth-largest U.S. bank could cut its dividend and post higher losses after its purchase of Wachovia.

The combined Wells Fargo and Wachovia last month posted a $13.72 billion fourth-quarter loss as it set aside more money to cover sour mortgages and other bad loans. Wachovia legally joined Wells Fargo on Dec 31, 2008 and the two banks are formally integrating now.

The market is starting to grow edgy about what may surface as they consolidate the Wachovia book of business into Wells Fargo, said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.

Wirtz added investors feared the bank could slash its dividend payout, even though Wells Fargo said last month it will maintain its payout.

Wells Fargo was once considered conservative in its assessments of Wachovia's loans. But investors and analysts have grown more worried about the bank's assumptions as market conditions deteriorated rapidly, particularly for loans known as option adjustable rate mortgages, which allow borrowers to choose whether to repay principal or just interest each month.

Last week, the bank increased the size of its previously reported fourth-quarter loss because of new investment losses. Wells Fargo said the charge boosted its quarterly after-tax loss to $2.73 billion, or 84 cents per share, from a previously reported $2.55 billion, or 79 cents.

Options flow suggests concern that Wells Fargo shares have the potential to trade below $9 over the next five weeks, said Henry Schwartz, president of option analytics firm Trade Alert.

Wells Fargo shares were down 3 percent at $13.28 at midday on the New York Stock Exchange after falling as much as 12 percent to their lowest level since April 1997. The shares have fallen 56 percent this year, since the Wachovia deal was closed.

(Reporting by Juan Lagorio; Additional reporting by Doris Frankel in Chicago; Editing by Brian Moss)