The scramble by once-stable American financial institutions to find a rescuer continued today as Morgan Stanley stepped up separate talks with Wachovia and the state-owned China Investment Corporation (CIC) while Washington Mutual put itself up for sale.

Morgan Stanley, whose shares dived by 24 per cent on Wednesday on concerns about its ability to borrow the cash it needs to run its business, is in discussions with Wachovia, the US retail bank, with a view to merging the two operations.

The group’s shares dived by a further $7.35, or 35 per cent, to $14.40 in early-afternoon New York trading, bringing their decline for the week so far to nearly 60 per cent.

The share price drop – which occurred despite a strong third-quarter profit announcement on Tuesday night and a healthy balance sheet – could make it impossible for Morgan Stanley to function by hitting the confidence of customers, trading partners and lenders, making them increasingly unwilling to deal with the group.

Morgan Stanley is also negotiating to sell a stake in itself to CIC, the Chinese sovereign wealth fund, which injected $5.6 billion into Morgan in December, for a 9.9 per cent stake.

A deal with CIC would probably see the fund increasing its holding in Morgan Stanley to just under 50 per cent, to avoid the political sensitivities associated with the takeover of a key US financial firm by the Chinese government.

Morgan Stanley began discussions with Wachovia, CIC and other potential acquirers on Wednesday after an approach to Citigroup was rebuffed earlier this week.

Washington Mutual has also bitten the bullet and accepted that an outright sale is the best way to secure its future, after Standard & Poor’s cut its debt to junk status on Monday. However, WaMu is also understood to be considering other ways of raising money, including the sale of a minority stake.

WaMu, which is expected to take a further writedown of about $20 billion on its remaining sub-prime mortgage portfolio, in addition to the $8 billion it has taken in the past year, has hired Goldman Sachs and Morgan Stanley to examine fundraising options for savings and loan institute, which has lost more than 90 per cent of its value this year.

JPMorgan is among the groups thought to be most interested in buying WaMu, in large part because the savings and loans institute has a strong network of retail branches in California and Florida, where JPMorgan is keen to boost its presence.

WaMu is also thought to have approached Citigroup, HSBC and Wells Fargo.

Sources said that a sale of WaMu, headquartered in Seattle, may prove difficult to complete. It could be hard for the parties to agree a price and it could be that no-body is willing to take on the risks associated with WaMu’s toxic assets, without a government guarantee.

US federal regulators are understood to be actively involved in the sale of WaMu, although it is not known whether they are prepared to use further taxpayers money to backstop a deal.

Although the US government guaranteed $29 billion of Bear Stearns most toxic debt in March as it drove through the brokerage’s sale to JPMorgan, it resisted bailing out Lehman Brothers this week, forcing the group to file for bankruptcy protection on Sunday night.

Shares in Goldman, which fell by 14 per cent on Wednesday, declined by a further $26.16, or 23 per cent, in early afternoon trading to $88.34. Investors drove down Goldman’s shares, increasing the prospect that it too will need to find a buyer. As with Morgan Stanley, shareholders are concerned that an independent brokerage, without a retail deposit base, will find it increasingly difficult to access credit as banks clamp down on lending to all but the safest borrowers.

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