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UPDATE 1-Citi in talks to merge brokerage with Morgan Stanley

(Adds companies declined to comment)

NEW YORK, Jan 9 (Reuters) - Citigroup Inc C.N is in talks to sell its Smith Barney brokerage unit, and is considering a joint venture with Morgan Stanley MS.N to merge their respective brokerage units, a source familiar with the matter told Reuters on Friday.

The discussions with Morgan Stanley are “serious” and “advanced,” the source said.

Under the plan being discussed, Morgan Stanley would own 51 percent of the joint venture and Citigroup would own the rest. Citigroup would cede operational and strategic control of the retail brokerage business to Morgan Stanley.

Morgan Stanley would expect to buy the rest of Citigroup’s Smith Barney business over the next three to five years, the source said.

The plan would allow Morgan Stanley to diversify its revenue stream, and would allow Citigroup to cut costs and gain capital, the source said.

Citigroup and Morgan Stanley declined to comment.

The news comes as Robert Rubin, former Treasury secretary sharply criticized for his role in the financial turmoil at Citigroup, resigned from the bank.

Citi shares fell following the news, closing at $6.75, down 5.7 percent, on the New York Stock Exchange.

Shares of Morgan Stanley ended up 1.28 percent at $19.06.

Reporting by Dan Wilchins; Writing by Jui Chakravorty, editing by Bernard Orr, 646-223-6033

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