US banking giant Morgan Stanley was racing to salvage a crucial investment from a big Japanese bank in an effort to allay growing fears about its future negotiations so critical to the financial markets that they have drawn in both the US Treasury Department and the Japanese government, a media report said on Monday.

Morgan Stanley was locked in talks on Sunday to renegotiate its planned $9 billion investment from the Mitsubishi UFJ Financial Group of Japan, the New York Times reported citing people involved in the talks.

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The completion of a deal might help calm markets worldwide, which sank last week because of escalating concerns about the fate of financial institutions like Morgan Stanley, the paper said, adding that investors might read the investment as a sign of confidence in the bank's future.

Mitsubishi, the report said, was pressing for more favourable terms after Morgan Stanley lost nearly half its market value during last week's stock market plunge.

Treasury, however, is not planning to have the United States government take a direct stake in Morgan Stanley as part of a broader effort to stabilise the financial industry and the markets.

Morgan Stanley is in the midst of the gravest crisis in its 74-year history, even though analysts estimate that the bank has more than $100 billion in capital. Morgan Stanley's shares price has plunged nearly 82 per cent this year, closing at $9.68 on Friday.

Last month, Mitsubishi agreed to buy about 21 per cent of Morgan Stanley. The investment was to be made in the form of $3 billion in common stock, at $25.35 a share, as well as $6 billion in convertible preferred stock with a 10 per cent dividend and a conversion price of $31.25 a share.

Under the proposed new terms being discussed, the Times said, Mitsubishi would still buy roughly 21 per cent of Morgan Stanley. But all of the investment would be through preferred shares, with a 10 per cent annual dividend. Many of those shares would be convertible into common stock, but the Japanese bank was trying to set a conversion price far lower than originally proposed, the report said.

Mitsubishi and the Japanese government have sought assurances from the Treasury Department that if the United States were to decide to inject money into Morgan Stanley at a later time a possibility some analysts do not rule out that such a move would not wipe out preferred shareholders, the paper said.

Investors, the report noted, suffered deep losses when the government effectively nationalised the nation's largest mortgage finance companies, Fannie Mae and Freddie Mac. It is unclear how far those discussions have gone or whether any such assurances would be forthcoming, it said.

Henry M Paulson Jr, the Treasury Secretary, has pushed both companies to come up with a private-market solution and has indicated that he does not believe that Morgan Stanley needs capital from the US government, the report said.

However, he privately hinted to members of both companies that the government would back Morgan Stanley if it came to that, suggesting that he does not want to repeat the troubles that resulted from allowing Lehman Brothers to go bankrupt, the paper said citing people involved in talks.