Morgan Stanley in Talks with China's CITIC

Morgan Stanley is in talks to possibly be acquired by China's CITIC, sources in the U.S. and China have told CNBC.

No deal is certain at this time, however, and sources said that none was likely to be finalized Wednesday.

Word of the talks follows an earlier report in the New York Times that Morgan Stanley—one of the two last independent, U.S.-based investment banks—is considering a merger with Wachovia or another bank.

The Federal Reserve has been active in encouraging the Chinese to invest in U.S. financial institutions and has even made it clear that it would look favorably upon a Chinese acquisition of a U.S.-based financial institution, sources said.

Though Chinese financial institutions do not have a great deal of experience in running large investment banks, Citic does own the largest brokerage in China. Sources both in the U.S. and in China says discussions are ongoing. China’s sovereign wealth fund, China Investment Corporation (CIC), owns 9.9 percent of Morgan.

Morgan Stanley's senior management has been in talks with a number of potential buyers, and a deal becomes more likely as the investment bank's stock—which plunged [MS 22.55 0.80 (+3.68%) ] more than 24 percent Wednesday—declines further. London-bsaed HSBC has also been cited as a possible suitor for Morgan Stanley.

Morgan Stanley's chief executive, John J. Mack, received a telephone call on Wednesday from Wachovia [WB 14.50 5.38 (+58.99%) ] expressing interest in the Wall Street bank, the Times said.

The talks are preliminary and no deal may emerge.

Ongoing Turmoil for Big U.S. Banks

Meanwhile, Washington Mutual [WM 2.99 0.98 (+48.76%) ] has put itself up for auction, people briefed on the matter also told the Times.

Reports of both possible deals came after the market closed.

Earlier, anxious investors continued to hack away at Morgan Stanley and Goldman Sachs Group [GS 108.00 -6.50 (-5.68%) ], sending the two largest investment banks' shares lower.

Morgan Stanley's shares sank 40 percent below the depths reached during the Asia debt crisis and collapse of Long Term Capital Management a decade ago. Goldman stock plummeted 22 percent to a three-year low. This year, Goldman shares have fallen 45 percent and Morgan's are down 57 percent.

Investors also bid up the price of protecting against a default in debt issued by the banks, indicating growing concern that Wall Street's biggest firms are in jeopardy.

"The credit crunch and credit contraction is intensifying," said Peter Boockvar, an equity strategist at Miller Tabak in New York. "The action in Morgan Stanley in light of what was better-than-expected numbers last night is disconcerting."

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