Citi inches toward deal but shares off

By Dan Wilchins and Joseph A. Giannone

NEW YORK (Reuters) - Citigroup (C.N) inched closer to selling a stake in its Smith Barney retail brokerage to Morgan Stanley (MS.N), but its shares fell on concerns about the bank's balance sheet and its fourth-quarter results.

Citigroup shares closed down $1.15 (78 pence), or 17 percent, to $5.60 on the New York Stock Exchange, bringing the company's market value down to $30.5 billion. The shares hit their lowest level since November 24, a day after the company received a $20 billion capital infusion from the U.S. government.

JPMorgan Chase & Co (JPM.N) and Bank of America (BAC.N) shares also dropped on concerns about their credit problems.

Governments worldwide have been infusing cash into major banks and taking stakes in them as battered banks look to shore up capital. Citi's move to sell a stake in one of its prized assets is the latest sign that the global financial sector is still enmeshed in a widening credit crisis that started in 2007.

Citigroup and Morgan Stanley have agreed on major terms, and are expected to announce a deal by mid-week, a person familiar with the matter said.

Morgan Stanley would combine Citigroup's Smith Barney unit with its own retail business to create the world's largest network of brokers, according to sources.

Citigroup, the third-largest U.S. bank by assets, would retain a 49 percent stake in the joint venture, and receive a payment in excess of $2.5 billion and would write up the value of its brokerage business, boosting capital.

Morgan Stanley would expect over time to buy the whole of Smith Barney.