Kamala Harris said the settlement currently on the table is not adequate, the Los Angeles Times reported.
She promised a tougher investigation in California of alleged financial wrongdoing and said she objected to the banks' demands they be shielded from further investigation as part of a settlement.
"I have decided that we have to go our own course and take an independent path, and that decision is because we need to bring relief to Californians that is equal to the pain California experienced," Harris told the Times. "What is being negotiated now is insufficient."
Harris had been playing a leading role in the 11-month effort to negotiate a settlement with mortgage holders, including giants like Bank of America and JPMorgan Chase & Co.
Some experts told the Times California's departure could doom the negotiations, but a source the newspaper did not identify said the other states plan to continue.