NEW YORK - JAPAN'S Mitsubishi UFJ Financial Group , which watched Morgan Stanley's share price plunge last week, is amending its US$9 billion (S$13 billion) deal to include only convertible preferred shares and no common stock, a person familiar with the matter said.

Under the revised terms of the deal, Morgan Stanley will still sell a 21-per cent stake to MUFG for US$9 billion, but the amount will be entirely in convertible preferred shares, the source said.

The original terms included US$6 billion in convertibles and US$3 billion in common equity.

Exact details have not been disclosed, but the new terms will allow MUFG to buy preferred shares that will convert into common stock at a price range of US$20 to US$25, the source said.

MUFG's move to seek convertible shares instead of all stock avoids a near-term loss, while still letting it benefit when the shares recover.

In the meantime, MUFG will also earn a high-yielding 10 per cent interest on the preferred shares.

The Morgan Stanley news comes as Spain's Banco Santander SA was in advanced talks to buy full control of Sovereign Bancorp Inc , according to a source familiar with the matter.

As part of the MUFG deal, the company will also provide letters of credit and a credit line to support Morgan Stanley in a move that would reassure investors worried about the US bank's liquidity.

The US government will not invest alongside MUFG, the source said.

The Wall Street Journal earlier reported that the government would express its support for the deal and work to structure any potential future investment in Morgan Stanley in a way that wouldn't wipe out MUFG's investment.

MUFG has been under some pressure to change terms of the deal because its original investment for 21 per cent of the firm was agreed to before Morgan Stanley's 58-per cent share price drop last week, leading to a market value of US$10.3 billion for the entire company.

Morgan Stanley, which closed down 22.3 per cent at US$9.68 Friday on the New York Stock Exchange, declined comment.

Deal was expected to close Tuesday
The company had said that come this Tuesday, its agreement to sell a 21 per cent stake to MUFG for US$9 billion could be completed. Yet many investors were convinced that Morgan would not make it that long, hammering the stock price to its lowest in 14 years.

Both sides last week insisted the deal would still close as written, but investors were not so sure. At the same time, rising default insurance costs and the plunging price of some debt also raised worries that its trading and prime brokerage businesses could be hurt.

'It comes down to confidence,' Ladenburg, Thalmann & Co banking analyst Richard Bove said in a client note. 'The company must have the ability to roll over its debt and operate with counterparties in the market on a daily basis. If it can do this, it will survive and ultimately thrive.'

Mr Bove declined to predict whether Morgan would be able to resolve its problems, sticking to a 'neutral' rating for its shares.

In a related development, European leaders raced against the clock on Sunday to craft a rescue strategy for banks hit by the worst financial crisis since the 1930s, focusing on pledges to recapitalise banks or buy debt they issue.

According to a draft statement circulated at a summit in Paris, leaders from the euro currency area were working on a plan that includes commitments to provide capital, and to insure or directly buy into debt issues.

Meanwhile, Goldman Sachs Group, the fourth-largest US bank, is by no means out of the woods.

Despite raising US$10 billion from Berkshire Hathaway, the holding company run by billionaire Warren Buffett, and public investors, Goldman's stock price also came under attack.

Shares of Goldman closed down 12.3 per cent at US$88.80 Friday on the NYSE. -- REUTERS