UPDATE 6-Morgan Stanley trading desk powers earnings beat

* EPS 38 cents; Wall Street view 27 cents

* Breaks string of three straight quarterly losses

* Shares close nearly 5 percent higher (Adds background, updates share price)

By Steve Eder

NEW YORK, Oct 21 (Reuters) - Morgan Stanley's (MS.N) riskier trading operations have stolen the thunder from its growing brokerage -- at least for now.

Strong fixed income sales and trading revenue and improved investment banking underwriting results broke a three-quarter losing streak as Morgan Stanley belatedly joined rivals like Goldman Sachs Group Inc (GS.N) in returning to the black after the collapse of the financial sector a year ago.

The New York-based bank reported third quarter net income of $498 million, or 38 cents a share, beating analysts' average forecast of 27 cents a share, according to Thomson Reuters I/B/E/S.

Morgan Stanley shares closed up about 5 percent at $34.08 on the New York Stock Exchange after earlier touching a 13-month high of $35.

In the 2008 third quarter the bank earned $7.7 billion, or $7.38 a share, boosted by a one-time accounting gain from declines in the value of its debt.

Scarred by the collapse that claimed competitors like Lehman Brothers, Morgan Stanley has pledged to play a more conservative hand as it develops its brokerage business.

Co-president James Gorman is set to succeed Chief Executive John Mack -- credited with keeping the bank alive during the darkest days of the crisis, but criticized for struggling to manage risk -- early next year.

Many analysts view Gorman's appointment as evidence that Morgan Stanley is trying to dial down the riskier trading business in favor of a steadier stream of income from the wealth management business.

MAKING UP GROUND

Morgan Stanley Chief Financial Officer Colm Kelleher said in an interview that the third-quarter results were an "affirmation" that the firm's strategy was bearing fruit.

The third-quarter rebound came largely because of solid results in trading, a riskier area of the business.

"They made up the ground on the trading side," said Brad Hintz, an analyst with Sanford C. Bernstein in New York and former treasurer at Morgan Stanley. "The issue that Morgan Stanley faced is they cut too deeply in fixed income and markets came back more quickly than they anticipated."