Citigroup confirmed Tuesday it is discussing with Morgan Stanley about a possible combination of Citi's Smith Barney retail brokerage and Morgan Stanley's wealth management business.

Although Citigroup said no agreement has been reached , its shares declined the most since November, down 3.8 percent or 21 cents to $5.39 each by 10:40 a.m. on the New York Stock Exchange.

In the terms of the deal being discussed, Morgan Stanley would pay $2.5 billion to Citibank for Smith Barney and in return take a 51 percent stake in the combined brokerage, The Wall Street Journal reported.

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