China Investment Corp, the state-owned investment fund, is in talks to buy up to 49% of Morgan Stanley.

Morgan Stanley is believed to be exploring selling the stake to CIC, which bought a 9.9% stake in December.

The move would be an alternative to a merger with US lender Wachovia, which approached Morgan Stanley with the suggestion yesterday.

CIC, with the financial backing of the Chinese government, could be seen as a stronger financial backer than the troubled Wachovia.

Morgan Stanley set a new share price low for the past 52 weeks on Wednesday when shares fell to 16.08p each, a 72% drop over the year