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Morgan Stanley has seen further drops in its share price at the New York Stock Exchange's open this morning, dropping seven per cent by 10:20 (15:20 BST).

The second biggest Wall Street bank, behind Goldman Sachs, has seen its share value fall by 42 per cent since smaller rival Lehman Brothers went bankrupt this week.

Rumours of an approach from Wachovia, the fourth biggest bank in the US, have sent share prices down further as analysts react with uncertainty to the speculation.

Although neither bank has commented on the talk, several news sources, including Reuters and CNBC have reported Morgan Stanley's chief executive received a call from Wachovia yesterday.

But analysts are unsure whether a combination of the two banks would improve Morgan Stanley's prospects, as Wachovia's credit risk is still unknown.

Goldman Sachs is also still under pressure today, and shares fell seven per cent by 11:00 EST (16:00 BST).

The five independent Wall Street banks – Goldman Sachs, Morgan Stanley, Lehman Brothers, Bear Stearns and Merrill Lynch - have become just two, Goldman Sachs and Morgan Stanley.

Although both Goldman Sachs and Morgan Stanley – which took over Bear Stearns earlier in the year – are both adequately capitalised, investors have lost confidence in their business model as the short-term financing these banks rely on has dried up.

Merging with a commercial bank would provide a steady stream of retail deposits and could help re-build confidence.

Actions by the Federal reserve to inject cash to ease the liquidity squeeze helped boost equities when the US markets opened.

The Dow Jones industrial index opened slightly higher today at 10,609.01, after a four per cent fall yesterday to close at 10,609.66. By 10:00 EST in New York, the index had climbed further to 10,824.37.