Talk of a merger between Wall Street titan Morgan Stanley and US retailer bank Wachovia could end up being a three-way deal with a state-backed major Chinese investor.

Wall Street was abuzz this evening that China Investment Group could be interested in upping its stake in Morgan Stanley.

The Chinese already have a 9.9% stake in Morgan Stanley and there is speculation that the holding could be increased to 49%.

Rather than replace the putative merger between Morgan Stanley and Wachovia, the Chinese interest could come as part of the deal.

The news of the interest came as Morgan Stanley boss John Mack admitted he had had an approach from Wachovia yesterday and amid reports that talks between the two are now “advanced”.

Analysts, however, are expressing doubt over the viability of a straight Morgan Stanley-Wachovia deal especially as, given the perceived state of the investment bank's balance sheet, the transaction is likely to be a Wachovia takeover.

Wachovia is one of America's biggest main street regional banks but as such is certainly not free from the millstone of huge exposure to the collapsed US housing market. Morgan Stanley shares lost another 10% after the opening bell on Wall Street.