Oct. 7 (Bloomberg) -- Morgan Stanley's agreement to raise $9 billion from Japan's Mitsubishi UFJ Financial Group Inc. is going ahead, the companies said, after speculation the deal may fall through caused Morgan's stock to drop as much as 40 percent.

``The deal is proceeding on track'' and will close as soon as this weekend, said Mark Lake, a spokesman for New York-based Morgan Stanley. ``The deal is expected to close imminently upon expiration of the Federal Reserve's five-day post-approval waiting period.'' Takashi Takeuchi, a spokesman for Tokyo-based Mitsubishi UFJ, said the bank will make the investment once it receives regulatory approvals.

The Fed and other ``key global regulators'' have approved the agreement by Japan's largest bank last week to buy $3 billion of Morgan Stanley's common stock at $25.25 apiece and $6 billion of convertible preferred stock, Morgan Stanley said in a statement. The shares have closed below $25.25 every day since the agreement was reached.

``There's a rumor Mitsubishi may pull out,'' Fred Froewiss, vice president of institutional sales at RF Lafferty & Co. in New York, said earlier today. ``Maybe they're getting cold feet because of the freeze in the credit markets. The market is really trading on whispers and fear.''

Morgan Stanley dropped $5.85, or 25 percent, to $17.65 in New York Stock Exchange composite trading after falling as low as $14.13 earlier in the day.

Leverage Ratio

Morgan Stanley, which last month opted to convert itself into the fifth-largest U.S. bank holding company, also said today that it cut assets on its balance sheet 9 percent to $900 billion from $987 billion on Aug. 31. The decline in assets and the increase in equity will reduce Morgan Stanley's leverage, a measure of how much it depends on borrowed money.

Based on Morgan Stanley's asset levels on Aug. 31, the Mitsubishi investment would cut Morgan Stanley's ratio of assets- to-equity, or leverage, to less than 20 to 1, the firm said today. The company's Tier 1 capital ratio, which measures assets on a risk-adjusted basis, will be more than 15.5 percent, more than double the 6 percent required by the Federal Reserve.

``There's a lack of confidence in the entire financial system right now, and the firms in the spotlight are the ones that are the most levered,'' said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

Last Updated: October 7, 2008 20:50 EDT