Sources: Morgan Stanley/Wachovia Talks End

NEW YORK (Reuters) – Merger talks between Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and regional bank Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) have ended as Morgan focuses on a partnership with Japan’s Mitsubishi UFJ Financial Group (8306.T: Quote, Profile, Research, Stock Buzz), sources familiar with the situation said on Wednesday.

Morgan had been engaged in merger talks with North Carolina-based Wachovia last week, when investor fears about the viability of the Wall Street broker-dealer model slashed Morgan’s stock price and prompted some of its customers to flee. At the time, merging with a commercial bank was viewed as a way for Morgan to increase its financial stability and reassure jittery investors.

But on Sunday the second-largest Wall Street firm converted to a bank holding company structure, gaining permanent access to Federal Reserve funding and making it easier for Morgan to acquire other banks. The next day, Morgan announced plans to sell a stake of as much as 20 percent to MUFG, Japan’s largest bank, a deal that would raise $8.5 billion and create a partnership to pursue other opportunities.

These moves made a Wachovia deal less critical, the sources said. Morgan executives are now focused on ways to expand its deposit base and banking franchise.

Morgan Stanley and Wachovia declined to comment.

(Reporting by Joseph A. Giannone and Paritosh Bansal; editing by John Wallace)