Mumbai: Morgan Stanley, the world''s No. 2 securities firm, has reported seven per cent fall in its third-quarter income, reflecting damage caused by the sell-off in the mortgage and corporate loan markets.

Morgan Stanley said it suffered losses on loans for leveraged buyouts and a decline in fixed-income trading revenue, though revenue from investment banking and stock trading rose strongly.

Income from continuing operations fell seven per cent to $1.47 billion, or $1.38 a share, in the quarter ended August 31, from $1.59 billion, or $1.50, a year earlier. Net revenue rose 13 per cent to $8.0 billion from last year.

New York-based Morgan Stanley, the second of four Wall Street firms reporting this week, had a steeper profit slide than the 3 per cent drop cited yesterday by smaller rival Lehman Brothers Holdings Inc. Morgan Stanley got higher revenue from equities, investment banking and money management, but that was offset by a slump in fixed income and $877 million in writedowns, mostly on leveraged loans.

Firms, including Morgan Stanley, have committed to provide about $320 billion of leverages buy-out loans under terms set before credit markets began deteriorating. New York-based Lehman yesterday took a $700 million loss after writing down mortgage holdings and loan commitments by $700 million.

Colm Kelleher, Morgan Stanley''s incoming chief financial officer, said the current credit crisis was worse than the deterioration that followed Russia''s debt default and the collapse of hedge fund Long-Term Capital Management LP in 1998.

Morgan Stanley said its total revenue rose 13 per cent to $7.96 billion. Return on equity from continuing operations dropped to 17.2 per cent from 23.3 per cent. Including results from the Discover credit card unit Morgan Stanley spun off in June, net income fell 17 per cent to $1.54 billion, or $1.44 a share.

Morgan Stanley took a bigger role in mortgages in December, just as the subprime crisis was unfolding, when it bought Saxon Capital Inc. for $705 million. Mortgage provider Saxon also services home loans to people with patchy credit histories by collecting payments, maintaining records and foreclosing on delinquent borrowers.