Citigroup confirms Morgan Stanley talks; stock falls

Shares of CITIGROUP (C.NY)fell on worries that credit losses will increase substantially.

In a brief statement on Tuesday, Citigroup said it is holding discussions about combining its Smith Barney brokerage with Morgan Stanley's wealth management business but that no agreement has been reached. News of the talks first surfaced on Friday.

Shares of Citigroup, a Dow Jones industrial average component, fell 29 cents, or 5.2 percent, to $5.31 in early trading. They earlier fell to $5.07, their lowest level since the bank won a government rescue on November 24. The stock had fallen 17 percent on Monday.

Analysts are hurriedly boosting their forecasts for expected losses at New York-based Citigroup after reports surfaced on Sunday that the third-largest U.S. bank could post a fourth-quarter operating loss in excess of $10 billion. The bank is scheduled to report results on January 22.

Results "are likely to continue to be pressured by very sharp increase in credit costs, predominantly in the U.S., further large writedowns, high cost of additional preferred capital, (the) high cost of expensing insurance provided by the government, and very weak performance in its investment banking related businesses," JPMorgan analyst Vivek Juneja wrote on Tuesday.

The analyst now expects a fourth-quarter loss of $1.09 per share, reflecting a gain of 74 cents per share from the sale of its German retail banking business, and a 2009 loss of 30 cents per share. He previously expected profits of 45 cents for the quarter and $2.10 for the year.

(Reporting by Jonathan Stempel; editing by John Wallace)