UPDATE 2-Morgan Stanley offers option to hedge fund clients

* Clients can now use trust bank

* Adds new layer of asset protection to lure clients (Adds information about government backing, adds background)

NEW YORK, June 17 (Reuters) - Morgan Stanley (MS.N) said it will allow hedge fund clients to place some of their holdings in a trust bank, offering a new layer of asset protection to lure prime brokerage clients who jumped ship amid market turmoil last year.

The bank said on Wednesday the assets would be held by Morgan Stanley Trust National Association, a U.S. national chartered trust company and a subsidiary separate from Morgan Stanley's U.S. and UK broker dealers.

The initiative is designed to help Morgan Stanley recoup hedge-fund clients it lost last fall.

Morgan Stanley has since seem some customers return. It said in April that the balances of its top 50 prime brokerage accounts increased 10 percent in the first quarter.

During a personnel shake-up in May, Stu Hendel stepped down as the global head of Morgan Stanley's prime brokerage unit and was succeeded by UBS's (UBSN.VX) Alex Ehrlich.

Morgan Stanley Trust National Association is regulated by the Office of the Comptroller of the Currency, which regulates the nation's largest banks. Unlike deposits in those banks, however, the trust assets will not be insured by the U.S. government. (Reporting by Steve Eder; Editing by Brian Moss and John Wallace)