Although Friday’s bounce-back in financial markets has relieved some of the pressure,  Morgan Stanley's chief executive John Mack has continued discussions with Bob Steel, head of the US retail bank Wachovia, about joining forces, according to reports in UK newspaper the Independent.

The report was written before the announcement that Morgan Stanley, along with Goldman Sachs, have become deposit-taking and lending banks and have turned their back on investment banking as defined under the 1933 Glass-Steagall Act. Reports indicate that this move may spell the end of talks between the Morgan and Wachovia.

Late last week, it was being reported that as many as 10 per cent of Morgan Stanley's hedge fund trading clients had quit, although the company went on insisting it had the capital strength to withstand that part of the business going altogether.

Mr Mack told staff that he would battle to keep Morgan Stanley's independence, but that all options were on the table, given the behaviour of the financial markets.

China Investment Corp, which has a 9.9 per cent stake in Morgan Stanley, was also reportedly involved in negotiations, first about taking that stake up to 49 per cent and then, later, about injecting capital into a combined Morgan Stanley-Wachovia.

The progress of Morgan Stanley's talks with Wachovia is likely to turn, according to the report, on whether Friday's rally is sustained and on the emerging details of the US Treasury's plan to buy up “toxic” mortgage assets, of which Wachovia is likely to be a big seller.