Morgan Stanley, the only large Wall Street bank to avoid major job cuts this year, said on Thursday that it would fire 1,600 employees in the first quarter to cut costs as trading and banking revenue show few signs of recovering.

Morgan Stanley declined to say how much it would save from these cuts, but if the cost savings are similar to those seen by Goldman Sachs Group Inc , the bank may save about $2 billion in compensation expenses. Goldman reduced its payroll by 1,300 last quarter, saving $1.6 billion in compensation costs.

Still the cuts, which amount to 2.6 percent of the bank's workforce, may be too small and Morgan Stanley will have to do more to show it is serious about earning a better return for shareholders, analysts said.

Business is slow, but none of these cuts seem like radical changes in the business model to me, said Chris Kotowski, a bank analyst at Oppenheimer & Co.

Large banks across the world have outlined plans to cut more than 125,000 jobs this year, according to a Reuters tally.

Goldman, JPMorgan Chase & Co , Bank of America Corp , Citigroup Inc and other U.S. banks are among those that have announced staff reductions ranging from 0.4 percent to 10 percent of their workforces.

These cuts come as banks see their profitability sink amid the weak global economy and European debt crisis. Clients are holding back on trading and dealmaking activity until markets become less volatile. At the same time, the value of securities banks hold for investments, clients or market-making purposes has declined, further hitting the bottom line.

At Morgan Stanley, which employs 62,648 people globally, the job cuts will come across all staff levels and geographic areas, including investment banking, trading and back-office functions, spokesman Mark Lake said.

Analysts expect the bank to trim more jobs toward the middle of next year, as the Morgan Stanley Smith Barney franchise is further integrated .

Offices can be consolidated across the MSSB network, middle-management ranks can be thinned and support staffs rapidly resized, said Sanford Bernstein & Co analyst Brad Hintz, a former Morgan Stanley treasurer.

Before Thursday's announcement, Morgan Stanley had kept firings limited to several hundred underperforming financial advisers earlier in 2011.

Executives have emphasized that the bank had not built up staff as much as competitors during a brief market revival in 2009, and that they were still building up Morgan Stanley's fixed-income trading division.

The company has also cut costs unrelated to pay, such as Blackberry use, travel and data services, and lifted an annual expense savings target from the Smith Barney integration to $1.4 billion a year from $1.1 billion.

But those efforts have done little to calm investors worried about Morgan Stanley's exposure to the European debt crisis.

Although everyone gets hit on bad days with Europe, Morgan Stanley was the poster child, with the most extreme swings, said Walter Todd, a portfolio manager at Greenwood Capital who liquidated most of his Morgan Stanley shares last week.

Shares of Morgan Stanley and Goldman are both trading at discounts to tangible book value, and both are down more than 44 percent so far this year, as of Wednesday's close. The NYSE Arca Securities Broker/Dealer Index, which includes both stocks, is down a more moderate 33 percent, while the S&P 500 Index is down 3.6 percent.

BLEAK OUTLOOK

Analysts are in the midst of a new round of cuts on their profit estimates for investment banks.

Morgan Stanley is likely to report a loss in the fourth quarter, according to recent analysts' estimates, due to a special $1.2 billion charge related to a settlement with the bond insurer MBIA Inc .

Even excluding that charge, Morgan Stanley will earn just 15 cents per share for the fourth quarter, Atlantic Equities analyst Richard Staite predicted in a report on Thursday. That compares with 41 cents per share in the year-ago period.

Staite expects Morgan Stanley to earn a 2 percent return on tangible equity in the fourth quarter of 2011. That figure will climb to 6.6 percent in 2012, he predicted, still a far cry from the mid-teens level that some investors had been expecting.

Job cuts may help Morgan Stanley achieve better returns.

Goldman eliminated 4 percent of its staff during the third quarter by cutting 1,300 jobs. The move helped the bank lower compensation costs by $1.6 billion, above a target set in July to cut 1,000 jobs and save $1.2 billion.

But its return-on-equity for the first nine months of the year was 3.7 percent, far below Goldman's ROE levels that were above 30 percent before the financial crisis or the 22.5 percent it achieved in 2009.

(Reporting By Lauren Tara LaCapra; Editing by Paritosh Bansal, Derek Caney, Dave Zimmerman)