Morgan Stanley and JPMorgan Chase & Co are likely to be the lead underwriters in General Motors' initial public offering, The Wall Street Journal reported on Friday, a role more attractive for its prestige than its fees.

Banks were competing fiercely to underwrite an offering that could be as big as $10 billion, the newspaper reported, citing people familiar with the matter.

At that size, the deal would be the largest U.S. IPO since Visa Inc's offering of $19.7 billion in March 2008, according to Thomson Reuters data, and one of the biggest U.S. offerings of all time.

The U.S. Treasury Department owns nearly 61 percent of the automaker's common shares after GM filed for bankruptcy last year. The automaker has since emerged from Chapter 11, and an IPO is a key step for GM to end its support from the government.

The sooner they can get the government out of there the better, IHS Global Insight analyst Aaron Bragman said.

Morgan Stanley has been one of the government's key advisers in restructurings during the financial crisis. The bank advised the U.S. Treasury on Fannie Mae and Freddie Mac, and is helping the government sell its remaining stake in Citigroup.

The underwriting banks in the GM IPO are expected to get less than 2 percent of the deal in fees, a banker familiar with the deal said. A typical fee for a smaller IPO is 7 percent, but larger deals usually carry smaller fees in percentage terms, the banker said.

Bankers are eager to win this mandate because it is seen as prestigious, which should push fees lower, he added. But with the government looking to sell its entire stake over time, and the automaker's extensive corporate debt needs, underwriters hope that GM will generate more fees for them in the future, the banker said.

GM will choose the lead bankers for the IPO, but the Treasury has veto power over the selection, and will determine the fees paid to underwriters, the Obama administration said on Thursday.

The government would retain the right to decide whether to participate and at what level.

The Treasury provided $50 billion of bankruptcy and bailout financing to GM last year. That rescue included $43 billion of cash and nearly $7 billion of direct loans.

GM repaid a $6.7 billion loan in April. The rest of the U.S. investment is an equity stake that the government can start selling after GM launches an IPO.

GM has not said how big the IPO will be, but for taxpayers to be fully repaid the company must be valued at more than $70 billion. Last month, a JPMorgan debt analyst put GM's stock market value at nearly $90 billion. Ford Motor Co , in comparison, has a market capitalization of $38 billion.

With the U.S. stock market having dropped in recent weeks as Europe wrestles with a credit crunch, many initial public offerings have struggled to find buyers, forcing some companies to shelve IPO plans.

The timing of the GM offering is uncertain, but the Obama administration said it would not happen before the fourth quarter. Chief Executive Ed Whitacre has said an IPO is a possibility later this year or in 2011.

The Treasury hired Lazard Ltd last month as an adviser on a GM IPO. Under its 18-month contract with the Treasury, Lazard is being paid $500,000 a month until an IPO is completed.

In May, GM posted first-quarter profit of $865 million, surprising Wall Street, and said it might post its first full-year profit since 2004.

Morgan Stanley spokeswoman Mary Claire Delaney and GM spokesman Tom Wilkinson declined to comment on the Journal report. JPMorgan and the Treasury were not immediately available for comment.

Morgan Stanley shares were up 0.74 percent at $25.78, while JPMorgan was off 1.3 percent at $37.80, both in afternoon trading on the New York Stock Exchange.

(Reporting by Clare Baldwin, Soyoung Kim, Jui Chakravorty and Paritosh Bansal; Editing by Robert MacMillan, John Wallace and Steve Orlofsky)