Morgan Stanley will cut 1,000 jobs from its mortgage business and shut the UK sub-prime home loan division that it bought just over two years ago amid worsening market conditions.

The American investment bank blamed a “dislocation” in mortgage markets for redundancies in the United States and Britain, which will involve the closure of Advantage Home Loans, its UK mortgage division. About 160 jobs are likely to go at the business based in Ellesmere Port, Cheshire.

Anthony Meola, chief operating officer at Morgan Stanley, said: “Given the dislocation in the mortgage markets, we have restructured our residential mortgage business to ensure we are appropriately positioned for the environment going forward.”

Morgan Stanley bought Advantage at the end of 2005 as a way into the then-lucrative British sub-prime mortgage market. One of the bank's headline-grabbing deals was a loan aimed at first-time buyers that offered some borrowers seven times their income.

Advantage pulled the majority of its deals in December, but insisted at the time that the ranges would return in 2008. Morgan Stanley said yesterday that it would continue to sell mortgages to American homeowners through Saxon Mortgage Services.

The decision is the latest in a string of similar cutbacks by US investment banks in response to the credit crunch. Lehman Brothers has shed thousands of jobs.

Morgan Stanley's about-turn comes after the Financial Services Authority said that the British mortgage market was experiencing widespread fraud.The City watchdog said that it had referred a third of 200 brokers under investigation to its enforcement division after tip-offs from lenders about suspected fraudulent mortgage applications.

The FSA's head of fraud said that the problem was “bigger and more widespread” than previously thought.

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