US investment bank Morgan Stanley is in preliminary merger talks with

US lender Wachovia and is exploring other potential deals in an effort to avoid becoming the next victim of the credit crunch, according to media reports.

Wachovia’s approach to Morgan Stanley came after the shares of Morgan Stanley and Goldman Sachs fell sharply. The cost of insuring their debt through the credit derivative market also rose sharply.

Both banking groups operate wealth management businesses.

Morgan Stanley declined to comment, but people familiar with the situation said it had received a phone call from Charlotte-based Wachovia yesterday and its executives were considering the approach, the Financial Times said. They added that they were exploring other options including deals with other banks, the FT said.

John Mack, Morgan Stanley’s chief executive, was said to be livid at the plunge in the share price. He contacted Hank Paulson, US Treasury Secretary, and Christopher Cox, Securities and Exchange Commission chairman, accusing short sellers of targeting Morgan Stanley and urging them to take action.

In a memo, Mr Mack said: “There is no rational basis for the movement in our stock or credit default spreads...We’re in the midst of a market controlled by fear and rumours and short sellers are driving our stock down.”