NEW YORK (Reuters) - Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that destroyed their rivals as Wall Street braced for a week of political wrangling over a proposed $700 billion bailout for troubled banks.

Morgan Stanley went a step further and struck a deal with Japan's largest bank, Mitsubishi UFJ Financial Group. MUFJ agreed to buy up to a 20 percent stake, sending Morgan Stanley shares up 12 percent in pre-market trading.

The Fed's agreement to convert the once high-flying investment banks into more conventional depositary institutions was Washington's latest effort to restore calm to chaotic markets. It followed frantic talks between the Bush administration and Congress to prevent the crisis from pushing the economy into severe recession.

By agreeing to much tighter Fed regulation as bank holding companies, Goldman Sachs Group Inc and Morgan Stanley moved to avoid the fate of rivals that either collapsed or were taken over in the worst financial crisis to sweep Wall Street since the Great Depression.

U.S. stock futures were indicating a lower opening on Wall Street, while European stocks edged higher, the dollar fell and U.S. Treasury debt prices edged up as investors played it safe before the mechanics of the bailout plan are worked out.

"We need to see more details from the rescue package. What is missing is the price the U.S. authorities are going to pay for the toxic assets," said Heino Ruland, analyst at FrankfurtFinanz.

Goldman shares were down about 1 percent in early electronic trading, while Morgan Stanley shares were little changed.

Markets elsewhere in the world were helped as a movement to curtail short selling gathered force: the Netherlands, Taiwan and Australia all announced various forms of curbs over the weekend.

The rescue was cobbled together late in a week of seismic shifts on Wall Street that saw Lehman Brothers Holdings Inc file for bankruptcy, Merrill Lynch & Co Inc agree to sell itself to Bank of America Corp, and the Fed stage an $85 billion rescue for insurer American International Group Inc.

LAST SURVIVORS

Goldman and Morgan Stanley were the last surviving of the big five investment banks that shaped 20 years of Wall Street history. Bear Stearns collapsed earlier this year.

In their heyday, the investment banks took greater risks than their Fed-regulated rivals were allowed to. In return for tighter regulation, Goldman and Morgan Stanley will gain greater access to central bank funds and will find it easier to buy retail banks.

"It creates a perception of greater safety and supervision," said Chip MacDonald, mergers partner at law firm Jones Day.

After the Fed move, a mooted merger with banking group Wachovia Corp was no longer Morgan Stanley's priority, a person familiar with the negotiations said.

Elsewhere, Japan's biggest brokerage, Nomura Holdings Inc, is to buy the Asian operations of Lehman, a source with direct knowledge of the deal said.

In Europe, Nomura and Britain's Barclays Plc have pitched bids for parts of Lehman's business, as administrators seek to save as many jobs as possible.

Barclays is interested in Lehman's European equities business, a person familiar with the matter said. That could include 1,000 to 1,500 bankers and support staff, mostly in London.

AIG'S former chief executive, Robert Willumstad, has decided to forego a $22 million severance payment because he was unable to implement a restructuring plan he developed, The Wall Street Journal reported. Major shareholders concerned about the government takeover plan to meet on Monday to discuss alternatives, the newspaper said.

As the crisis reverberated through the fund management sector, the New York Post reported that asset manager Legg Mason was looking to go private in a move that could see one or more private equity investors, including Kohlberg Kravis Roberts & Co, buy it and spin off most of its numerous funds.

Stock markets around the world were battered last week before the bailout plan sparked a rebound on Friday that added more than $1.5 trillion to the value of stocks.

The largest-ever bank rescue would give sweeping powers to the U.S. Treasury to buy up toxic mortgage-related debt from financial groups, including U.S. subsidiaries of foreign banks.