Morgan Stanley on Wednesday said it has suffered a $3.7 billion loss stemming from its U.S. subprime mortgage exposure, which it expects will reduce fourth-quarter earnings by about $2.5 billion.

The Wall Street investment bank said the loss occurred in September and October, and might change before its fiscal quarter ends this month.

It attributed the loss to deterioration in capital markets, which was triggered in large part by the struggles of thousands of homeowners to keep up with mortgage payments. Morgan Stanley said markets may remain unsettled for several quarters.

The loss is the first significant financial setback for Chief Executive John Mack since he took over the investment bank in 2005.

Morgan Stanley joins a growing list of financial companies, including Citigroup Inc and Merrill Lynch & Co, to report large write-downs from exposures to lower-quality debt. Those three companies alone have in the last month announced about $24 billion of subprime write-downs.

Some analysts had projected a larger write-down at Morgan Stanley, and the company's shares rose about 2 percent in after-hours trading following the announcement. The shares had fallen for five straight days, dropping 23.9 percent.

People may be breathing a sigh of relief, said Peter Kovalski, who helps invest $12 billion at Alpine Woods Investments in Purchase, New York. Industry fundamentals remain strong, so this is the time to address the issue and get it behind you, rather than prolong the problem.

Morgan Stanley shares closed down $3.32, or 6.1 percent, at $51.19 in Wednesday trading. They rose to $52.20 after-hours.

Fox-Pitt Kelton analyst David Trone on Tuesday said Morgan Stanley might face a $6 billion debt write-down.

The $2.5 billion impact on net income equals 37 percent of Morgan Stanley's reported $6.8 billion of profit for the first nine months of its fiscal year.

We felt that it would take at least a quarter or two for the credit markets to return to a more normal extension of credit, and provision of liquidity, Chief Financial Officer Colm Kelleher said on a conference call. We now feel it that will take longer, perhaps several quarters, to return to more normal operating levels.

Morgan Stanley also projected solid fourth-quarter results in each of its other businesses, including investment banking, equities, wealth management and asset management.

Morgan Stanley can take the hit, said Sean Egan, managing director of Egan-Jones Ratings Co. in Philadelphia, an independent credit rating agency. Of all the players we worry about, Morgan Stanley is nowhere near the top of the list.

The investment bank said it has reduced its net exposure to U.S. subprime debt -- defined as the potential loss if all of the debt's value were wiped out -- to $6 billion as of October 31 from $10.4 billion as of August 31.

It has also reduced its total exposure to asset-backed collateralized debt obligations and related subprime debt to $9.3 billion on October 31 from $12.3 billion on August 31.

There's at least a couple of more years during which you're going to have increasing delinquencies (and) increasing foreclosures, and that will probably lead to increasing write-offs, billionaire investor Wilbur Ross said on CNBC television.

Analysts on average expected Morgan Stanley to report a fourth-quarter profit of $1.83 per share on revenue of $8.83 billion, according to Reuters Estimates.

(Additional reporting by Mark McSherry and Dan Wilchins)

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