Japan giant swoops for £5bn stake

Megabank Mitsubishi UFJ Financial was poised to pay about $9billion (£4.9billion) for the holding, with the exact price to be fixed after it has completed due diligence.

The deal means Morgan Stanley will be nearly a third-owned by Far Eastern investors, having last year sold a 9.9% stake to Chinese sovereign wealth fund China Investment Corporation (CIC).

Analysts said it enabled Morgan Stanley, led by chairman and chief executive John Mack, to keep its independence amid mounting pressure to find a strong partner to survive.

Fears for its financial health were raised last week in the wake of the collapse of Lehman Brothers and the takeover of Merrill Lynch by Bank of America as confidence in the banking system collapsed.

The proposed deal with Mitsubishi tonight came just hours after Morgan Stanley and rival Goldman Sachs gave up their status as investment banks and sought shelter from the Federal Reserve.

Morgan Stanley shares - which were hammered during last week's turmoil - jumped 11% tonight to $30.11. Goldman Sachs drifted nearly 2% lower to $127.80.

Mack had been in merger talks with regional banking giant Wachovia and was also thought to be considering fresh investment from CIC. Both these options now appear to be off the agenda.

Mack said the deal, outlined in a letter of intent between Morgan Stanley and Mitsubishi UFJ, strengthened the firm's balance sheet and opened new opportunities in Japan.

"This strategic alliance with Mitsubishi UFJ can put Morgan Stanley in an even stronger position as we look to realise the opportunities we see in the rapidly changing financial market place," he said.

"As one of the largest commercial banks in the world, Mitsubishi UFJ would be a valuable partner as we transition to a bank holding company and build our bank services and deposit base.

"This alliance also would build on Morgan Stanley's deep ties and market leadership in Japan and throughout Asia and help us to continue growing our business in this critically important region."

Mitsubishi UFJ has been increasingly keen to invest in leading financial brands in the US humbled by the credit crunch. Japanese banks have fared better than rivals in Europe and the US having recently recovered from a crisis of their own.

Struggling Western banks have welcomed billions of pounds and dollars of investment from the Far East and Middle East in the past 12 months.

Citigroup has taken investment from sovereign wealth funds in Singapore, Abu Dhabi and Kuwait. Temasek, which manages investments by the Singapore government, has ploughed money into Merrill Lynch, Standard Chartered and Barclays.