Citigroup Inc's stock fell sharply Monday as investors wonder how much more cash the troubled bank will need.

Citigroup, in an effort to raise capital, is hammering out a deal to sell the bulk of its retail brokerage to Morgan Stanley.

The joint venture - expected to be announced later this week - would lead to an after-tax gain for Citigroup of about US$5 to US$6 billion, a person close to the negotiations said Monday.

The person spoke on condition of anonymity because he was not authorised to discuss the ongoing talks.

But maintaining cash levels that are high enough to make up for upcoming losses remains a big challenge for Citigroup.

"While we believe this deal will provide some near-term capital relief, more likely will be needed," Meredith Whitney, a financial analyst at Oppenheimer & Co, wrote in a note Monday.

Citigroup stock fell 72 cents, or 10.7 per cent, to US$6.04 on Monday, even though most industry analysts were positive about the deal.

Lauren Smith at Keefe, Bruyette & Woods said in a note that the potential joint venture "seems like a win-win to us".

Morgan Stanley shares rose 89 cents, or 4.7 per cent, to US$19.95.

Citigroup lost more than US$20 billion between October 2007 and October 2008, and is expected to post another deficit for the final quarter of last year when it reports those results next week.

The government has already loaned Citigroup US$45 billion, and agreed to absorb the losses on a huge pool of mortgages and other assets.

Morgan Stanley - which got US$10 billion in government financing - is likely to pay Citigroup between US$2 billion and US$3 billion in cash for a 51 per cent stake in Citi's brokerage, Smith Barney, the person close to the talks said.

Pre-tax gain

In total, after accounting for the revaluation of Smith Barney, Citigroup would get a pre-tax gain of US$10 billion, or US$5 billion to US$6 billion after taxes, the person said.

Morgan Stanley would then have the option to buy the rest of Smith Barney over the next three to five years, the person said.

The joint venture between Smith Barney and Morgan Stanley's retail brokerage, the former Dean Witter, would employ a team of more than 20,000 and rival Bank of America Corp's Merrill Lynch in size. A fruitful merger could take a while, though.

"We expect that it will take three years to successfully merge these operations and in the meantime, the retail business will face a severe downturn," wrote Brad Hintz, senior analyst at Bernstein Research.

- AP