The investment bank, which posted a sharp drop in second-quarter revenue, expects its payroll to decline by about another 1,000 workers this year to meet a broader target of reducing staff levels by 7 percent from December 2011 levels, Chief Executive James Gorman said on Thursday.

Morgan Stanley is one of several big banks to outline further belt-tightening measures this week when reporting quarterly results. The industry is facing increasing pressure from shareholders to boost profitability as the European debt crisis, companies' reluctance to issue debt and equity, and slow stock and bond trading weigh on revenue.

Rivals including Goldman Sachs Group Inc, Bank of America Corp, and Deutsche Bank AG are also embarking on fresh rounds of staff cuts in their trading and underwriting businesses. Goldman expanded its cost-saving target by $500 million as the outlook has dimmed for near-term revenue growth.

"People have gotten more aggressive on containing costs than they had been a month or two ago," said Alan Johnson, a Wall Street compensation consultant. "You look out into the future and it just doesn't look like it's going to get better any time soon."

So far this year, U.S. banks have outlined plans to cut another 17,323 employees, in addition to the 63,624 job cuts detailed last year, according to outsourcing firm Challenger, Gray & Christmas.

Morgan Stanley is targeting a workforce reduction of 7 percent from the 61,899 employees it had at the end of 2011, Gorman said on a conference call with analysts. At June 30, Morgan Stanley had 58,627 workers, leaving it with around another 1,000 left to go.

The bank will achieve its goal through staff cuts and "applying a very high bar" for replacing workers who leave, Gorman said.

Times are tough enough that the bank is shrinking its balance sheet, too. Morgan Stanley hopes to cut its risk weighted assets by an eye-popping 30 percent by December 2014 from their September 30, 2011 levels of $346.79 billion.

With $317.19 billion worth of risk-weighted assets remaining at June 30, the bank has another $74.44 billion reduction to go.

Over the past year, banks have begun taking dramatic steps to reduce expenses, examining everything from bonus pools to mobile phone bills and office supplies.

Last year was the first in which banks delivered zero bonuses to some employees in an effort to contain costs, said Johnson, who has tracked industry pay for decades. Boards and shareholders are demanding better results and expect banks to fully downsize by the end of this year, he said.

"The collective view is that this is going to be a struggle and whatever size you should be, you should get there by January 1, 2013," said Johnson.

A WEAK QUARTER

In addition to broader industry challenges, Morgan Stanley had its own difficulties last quarter, which weighed on its profits.

The threat of a severe debt rating downgrade clobbered its bond trading business during the second quarter. The bank also faced broad criticism for its handling of the Facebook initial public offering: The shares sank 27 percent on their first day of trading.

Moody's Investors Service downgraded the bank less than many investors had feared, and Morgan Stanley's bond-trading business has picked up in the third quarter, but economic headwinds still make the environment difficult, Chief Financial Officer Ruth Porat said in an interview.

The results initially appeared better than analysts expected, but as analysts' reactions to the report trickled in, it became clear that the results were a disappointment.

Morgan Stanley's earnings of $564 million, or 29 cents per share, compared with an average estimate of 43 cents per share, according to Thomson Reuters I/B/E/S.

Revenue in all three of Morgan Stanley's main businesses -- investment banking, wealth management and asset management -- dropped in the second quarter.

Overall revenue fell 24 percent to $6.95 billion. Those figures include a $350 million gain from changes in the value of Morgan Stanley's debt relative to Treasuries, known as a debt valuation adjustment, or DVA.

The earnings compare with a loss of $558 million, or 38 cents per share, a year earlier, when the bank took a charge linked to converting preferred stock owned by Japan's Mitsubishi UFJ Financial Group into common stock.

The bank's bond trading business was the worst performer. When excluding DVA adjustments, the business posted a 60 percent revenue decline, to $770 million, a much bigger drop than Wall Street rivals, mainly because of fears about its impending downgrade.

Analysts said the results were a continuation of Morgan Stanley's shaky performance in recent years, particularly in fixed-income trading. After losing billions on investments linked to subprime mortgages in 2007 and 2008, the bank pulled back on bond trading, missing an opportunity to mint money in 2009 when bond markets became active again.

Since then, Morgan Stanley has been hesitant to make significant staff cuts as it aims to boost market share in key trading areas, but it has had uneven success.

"These results reflect somewhat of a familiar pattern at Morgan Stanley, with quarters of outperformance often followed by underperformance," said Roger Freeman, a bank analyst at Barclays.

Morgan Stanley will have to deliver several consecutive quarters of outperformance and establish a clear market-share trend to assure investors enough to close the valuation gap between itself and its main rival, Goldman Sachs, Freeman said.

As of Wednesday's close, Morgan Stanley was trading at 51 percent of its stated tangible book value as of June 30. Goldman closed at 77 percent of its June 30 stated tangible book value.

Morgan Stanley's gloomy results weighed on its shares Thursday. The stock closed down 5.3 percent at $13.25.

MOODY'S IMPACT

For much of the second quarter, investors fretted about whether Moody's would downgrade Morgan Stanley by three notches, which would leave the bank's rating just two steps above "junk" status. In the bond-trading business, clients are often reluctant to work with counterparties that seem less than rock-solid.

The downgrade came in late June and was not as bad as many investors had feared - the bank's main rating was cut two notches to "Baa1," three steps above junk.

But for the second quarter the damage was done. The threat of a downgrade stung, Porat told Reuters.

"We spent a lot of time with clients and counterparties addressing questions they might have - and that's time that otherwise would have been spent focusing on getting new business," she said.

"As the quarter wore on, in particular as Moody's extended the timeline for making its decision, it really just put more weight on the whole situation. Clients seemed to take this wait-and-see approach."

The bank has had to post $3.7 billion of collateral since the downgrade, but business has improved and the pace of collateral calls has slowed since late June, Porat said. So far in July, the bank had to post just $800 million more collateral.

"We're certainly seeing that the weight of that Moody's decision has lifted," she said.

Morgan Stanley has been focused on increasing its trading exposure to "flow products" that have high volumes and less risk, while reducing exposure to more complex securities that are treated unfavorably under new capital rules.

Shannon Stemm, a financial services analyst with Edward Jones, called the bank's asset reduction targets "aggressive" and said it will be difficult to increase trading profits while also reducing risk.

Stemm voiced concern about client business moving away from Morgan Stanley to competitors during the quarter, and how long it might take for that business to return.

Morgan Stanley's 60 percent decline in bond-trading revenue compared with a 17 percent drop at JPMorgan, a 4 percent drop at Citi and a 37 percent increase at Goldman Sachs.

"All of these companies are at the mercy of the macro environment, but within that some are winning and some are losing," said Stemm. "It was very clear this quarter that Morgan Stanley was on the losing end."

(Reporting by Lauren Tara LaCapra; Editing by John Wallace and Phil Berlowitz)

By Lauren Tara LaCapra