Morgan Stanley and London’s Warburg in Merger Discussions : Deals: A pairing of the two financial giants would create a global powerhouse. Morgan would be the majority partner.

In a move that would create a financial powerhouse on both sides of the Atlantic, Wall Street’s Morgan Stanley Group and S. G. Warburg Group of London on Thursday said they were discussing a merger of the two financial bluebloods.

A combination of two of the world’s top financial firms--under control of Morgan Stanley--would give the merged company greater access to corporations and investors around the globe. It also would transform Europe’s financial center by making an American firm dominant in London.

“It will probably make them the premier transatlantic investment bank,” said Peter Toeman at the investment bank Hoare Govett in London.

Morgan--the fourth-largest U.S. securities firm--and Warburg--Britain’s largest brokerage house--served as advisers to a combined $62 billion, or 17%, of the world’s merger business this year. Together they underwrote about $66 billion, or 6.5%, of all stocks and bonds sold in the United States and in Europe.

The merger talks are taking place amid the worst year on Wall Street since 1990, underscoring the growing competition among financial companies in worldwide capital markets. Morgan is also entangled in Orange County’s current financial fiasco, after lending the county an estimated $2 billion to buy bonds on credit.

Warburg has been the subject of merger or buyout rumors since early October, when the company warned that its profits would fall. After rumors about other banks bidding for Warburg hit the London Stock Exchange, pushing Warburg’s shares sharply higher Thursday, the company issued a terse statement identifying Morgan Stanley as its potential partner.

A few hours later, Morgan Stanley confirmed that the two were discussing a combination that would be “uniquely complementary” and involve the formation of a new holding company that would be held two-thirds by Morgan Stanley shareholders and one-third by Warburg shareholders.

Warburg’s stock closed 18% higher at $12.26 in London. Morgan Stanley shares fell $1.625 to $55.25 on the New York Stock Exchange.

The deal would give Morgan the benefit of Warburg’s extensive ties in Britain and elsewhere on the Continent. A merger with Morgan Stanley would give Warburg a strong presence on Wall Street, although as a minority partner in the new company it would lose a measure of independence.

“You’ve got a very strong, very well-regarded bank, each on its own turf. What they can make of it together, time will tell,” said Raphael Soifer, a financial services analyst at Brown Brothers Harriman & Co. in New York.

Both financial houses have served a long and wealthy line of clients ranging from German kaisers to American Presidents.

New York-based Morgan was founded in 1935 after Congress broke up the J. P. Morgan empire.

The Warburg family, whose firm was founded in the mid-17th Century, was among Europe’s most powerful banking families. In 1934, the Warburgs fled their native Germany for Britain to escape Nazi persecution.

The news did not sit as well with employees of the investment banks, which might eliminate overlapping departments and positions. At Morgan Stanley’s London offices, where workers learned of the merger talks when a bulletin flashed on financial trading screens, there was rampant fear of job loss, according to one employee.