Morgan Stanley plunges

Rumors circulated Tuesday that Mitsubishi would terminate its deal with Morgan Stanley.

NEW YORK (CNNMoney.com) -- Shares of Wall Street investment bank Morgan Stanley plunged more than 20% Tuesday afternoon as rumors spread that Japanese bank Mitsubishi UFJ may pull out of plans to buy a big stake in the firm.

Just two weeks ago, Morgan Stanley (MS, Fortune 500) agreed to sell up to a fifth of the company to Mitsubishi UFJ Financial Group (MUFG), one of Japan's largest banks, for about $9 billion.

A spokesman for Morgan Stanley said there is no basis for the rumor and that the deal is expected to be closed soon.

"The transaction is expected to close imminently upon the expiration of the Federal Reserve's five-day waiting period," said Mark Lake, a spokesman for Morgan Stanley. "We got approval yesterday, so the deal should be closed by the end of the weekend."

The company also released an official statement Tuesday afternoon saying that the deal had been approved by other global regulators and that the investment would bolster Morgan Stanley's capital position.

Mitsubishi could not immediately be reached for a comment. The Federal Reserve on Monday announced its approval of the proposed purchase but the companies must wait until Saturday to close the deal.

Shares of Morgan Stanley plummeted as much as 40% before recovering a bit later in the afternoon.

Mark Lane, a William Blair & Co. analyst, said a broken deal would be disastrous for Morgan Stanley. But he could not substantiate the rumor.

"The deal was reported to be very near completion," said Lane. "If the rumor is true, it would be a very good reason for Morgan's stock to fall like this."

Morgan Stanley and its Wall Street rival Goldman Sachs (GS, Fortune 500) have both been hit hard in the past month or so. The credit crisis already has led to the bankruptcy of Lehman Brothers as well as the sale of another prominent investment bank, Merrill Lynch (MER, Fortune 500), to Bank of America (BAC, Fortune 500).

In the wake of the market meltdown, both Morgan Stanley and Goldman Sachs asked the Federal Reserve last month to allow them to be classified as bank holding companies.

The Fed agreed to the request, which means the two firms are allowed to create commercial banking operations that can take deposits. This move should help Morgan Stanley and Goldman Sachs raise more capital.