Morgan Stanley has held Wachovia talks: source

These moves come as Morgan Stanley Chief Executive John Mack takes steps to ensure his firm remains one of the survivors of the ongoing credit crisis.

Mack received a call on Wednesday from Wachovia, the fourth-largest U.S. bank, expressing interest in a deal with the second-largest Wall Street firm, the source said.

Morgan Stanley was discussing a deal with U.S. regional banking powerhouse Wachovia, CNBC had also reported separately.

Lloyds TSB achieved a long-held ambition in Britain by scooping up the country's biggest mortgage lender HBOS in a $22 billion all-share deal timed to end a slump in its rival's shares prompted by fears about HBOS's funding

Among the possible buyers of Morgan Stanley, the Government of Singapore Investment Corp (GIC) said it would consider all possibilities, including taking a stake if approached.

A Morgan Stanley spokesman in Hong Kong declined to comment. A spokeswoman at HSBC, which this week became the world's biggest bank by market value, also declined to comment.

A senior executive at the Chinese group's CITIC Securities arm said his firm was not in any talks towards investment in Morgan Stanley. An official with the CITIC group could not be reached for comment.

With the financial landscape undergoing its most dramatic transformation since the Great Depression, potential takeovers lurked for No. 2 U.S. investment bank Morgan Stanley and weakened top U.S. savings bank Washington Mutual.

STOCKS TUMBLE
The MSCI index of Asia stocks excluding Japan fell 3.75 percent, while Tokyo shares were 2.22 percent lower. Hong Kong was especially hard-hit, with the Hang Seng index falling more than 7 percent.

Financial stocks in Europe were indicated to open lower, with Swiss heavyweights UBS seen down 7 percent and Credit Suisse down nearly 4 percent.

And Russian stock markets remained closed for a second day, with authorities unable to say when they would reopen.

"After the bailing out of AIG failed to reassure the market, it is difficult to imagine what could really stop the un-orderly deleveraging that is going on," French investment bank Calyon said in a Thursday note.

Panicked matchmaking followed the surprise $85 billion rescue of insurer American International Group by the U.S. Federal Reserve on Tuesday that did little to calm investors' nerve, with financial shares bludgeoned.

Shares in Macquarie Group, Australia's biggest investment bank, skidded 21 percent to their lowest level in more than 5 years amid funding worries.

Industrial and Commercial Bank of China, which had been the world's most valuable bank until being surpassed by HSBC on Wednesday fell nearly 14 percent.

"Stop The Insanity," pleaded a research note from Swiss bank UBS as U.S. financial shares appeared to be in free-fall. The U.S. stock market plunged 4.7 percent to a three-year low and the dollar slumped, while gold and oil soared.

Lending between big banks was essentially frozen by cash hoarding and mistrust, creating crises of liquidity and confidence. Overnight U.S. dollar lending rates have soared this week and traded as high as 8.5 percent on Thursday.

Japan and Australia pumped an additional $17 billion into money markets on Thursday to prevent banks from hoarding cash.

"Banks are reluctant to lend money to each other, everybody seems to sit on stockpiles of cash," said Markus Ammann, a trader at Bayerische Hypo und Vereinsbank in Hong Kong.

The AIG rescue capped a week of bailouts, bankruptcy and moves by central banks around the world to flood the financial system with funds to prevent it from seizing up.

Shares of Morgan Stanley and larger rival Goldman fell as much as 43 percent and 27 percent respectively, even after both reported better-than-expected quarterly earnings.

The cost of protecting debt in both spiked, reflecting investor fears their debt issues are no safer than junk bonds.

Morgan Stanley's Mack blamed short sellers, or investors who bet on falling stock prices, saying in an internal memo: "We're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down."

"The fear is who is next," said John O'Brien, senior vice president at MKM Partners in Cleveland. "It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear."

'ANYTHING'S POSSIBLE'
The U.S. Securities and Exchange Commission stepped in to curb short-selling, but share slumps stoked talk that Wall Street's two surviving investment banks may have to join up with a commercial bank to survive.

Morgan Stanley CEO John Mack got a phone call from Wachovia on Wednesday but is also pursuing other options, the New York Times reported.

"In this market, anything's possible. It seems like the market wants the investment banking model to disappear," said Danielle Schembri, a bond analyst covering brokers at BNP Paribas in New York.

Washington Mutual, beleaguered by mortgage losses, put itself up for sale, sources familiar with the situation said. Potential suitors include Citigroup, JPMorgan, Wells Fargo and
HSBC.

"I think there's going to be a lot of mergers and acquisitions for either good reasons or because people don't have choices," said Wells Fargo Chairman Richard Kovacevich.

He said his company was "buying with both hands" and said that he felt "like a kid in a candy store" given the distressed state of financial assets, but declined to comment on targets.

The merger mania spread to other trading businesses. U.S. power firm Constellation Energy was talking to potential suitors after its shares fell 58 percent this week on investor concerns the credit crisis has hurt its power trading.

CREDIT CRUNCH
As banking shares imploded, the White House said it was "concerned about other companies." On the U.S. presidential campaign trail, John McCain blasted Wall Street's "casino culture" and Barack Obama stressed protection for mom-and-pop investors.

The U.S. government was looking to raise $40 billion to boost the Fed's firepower as a major U.S. money market fund "broke the buck", or fell below $1.00 a share -- a rare event that has the potential to panic retail investors.

U.S. authorities have spent $900 billion to prop up the financial system and housing market.

The AIG rescue came just over a week after the bailout of mortgage finance companies Fannie Mae and Freddie Mac, and six months after the Fed brokered the sale of failed investment bank Bear Stearns to JPMorgan Chase.

Over the weekend Lehman Brothers Holdings Inc filed for bankruptcy and Merrill Lynch & Co struck a deal to sell out to Bank of America Corp.

Photo: AP