WALL STREET:MORGAN Stanley, the world's biggest prime broker and one of two remaining major US investment banks, is considering a merger with Wachovia or another US bank, according to the New York Times.

The paper reported that Morgan Stanley chief executive John Mack spoke to Wachovia representatives yesterday and that other banks have also expressed an interest in a merger.

Shares in Morgan Stanley and in Goldman Sachs, the other major US investment bank, fell sharply yesterday as confidence in both firms declined on Wall Street, forcing up the cost of insuring against a default by either bank.

Morgan Stanley shares fell as much as 44 per cent yesterday and closed down 26 per cent, while Goldman Sachs dropped more than 35 points before narrowing their loss to about 18 per cent.

The number of major independent investment banks on Wall Street was cut in half this week by the collapse of Lehman Brothers and the sale of Merrill Lynch to Bank of America. Investors have become increasingly wary of both Morgan Stanley and Goldman Sachs and the cost of protecting Morgan Stanley's debt is now higher than that of Bear Stearns before its collapse last March.

A merger with Wachovia would fortify Morgan Stanley with the commercial bank's deposit base, a move that could reassure investors.

Goldman Sachs insisted earlier this week that it is not interested in merging with or being taken over by any other financial institution.