BEIJING - TROUBLED US investment bank Morgan Stanley is in talks to sell a stake of up to 49 per cent to China's sovereign wealth fund, the Financial Times reported Friday, citing people close to the discussions.

The talks with China Investment Corp, or CIC, which bought a 9.9 per cent stake in Morgan Stanley in December, were 'advanced but no deal had been clinched yet', the paper said, quoting unidentified sources.

Morgan Stanley's top management prefer a stake sale to CIC to a merger with US lender Wachovia, according to the paper.

The paper said CIC president Gao Xiqing had been scheduled to meet Morgan Stanley executives in San Francisco.

When asked by China's state-run Xinhua news agency, an unnamed CIC official did not rule out the prospect of buying a stake in Morgan Stanley but pointed to political hurdles in the United States over such a deal.

Even if the CIC intended to buy a stake, it could be very hard now as the purchase of a stake, even one smaller than 10 per cent, could be subject to the US government foreign investment review,' the official said.

The Financial Times also said the sale of a significant stake of a blue-chip Wall Street firm to a state-owned Chinese institution could cause a political backlash in Washington.

Mr Nick Footitt, Morgan Stanley spokesman in Hong Kong, declined to comment on the report when contacted by AFP on Friday.

CIC was established last year charged with managing US$200 billion (S$287 billion) of China's bulging forex reserves, and has become an iconic symbol of the country?s growing financial muscle as it scours the world for acquisition targets.

The Government of Singapore Investment Corp (GIC), one of the world's largest sovereign wealth funds, said on Thursday it would explore a possible stake in Morgan Stanley if the US investment bank made an approach.

CNBC business network reported on Thursday that Morgan Stanley was also in talks to be bought by the Chinese bank CITIC.

The reports came in the same week that US investment bank Lehman Brothers filed for bankruptcy while another Wall Street firm, Merrill Lynch, was forced to sell itself to Bank of America for US$50 billion.