New Star Asset Management, John Duffield's beleaguered fund manager, is scrambling to find ways to retain essential staff as part of emergency talks with its five lenders over its £240 million debt burden.

New Star is trying to negotiate a debt-for-equity swap with its banks and is asking them to leave it with enough cash or shares to pay its best-performing fund managers as it strives to stop them heading for the exit in coming weeks.

Holding on to its star fund managers is crucial to the long-term future of the group, which is also working to stop investors pulling their capital out of its funds. Its most respected managers include Richard Pease, who runs the European growth fund, and Tim Steer, who manages New Star's hedge funds, among others.

The group is hoping to agree a deal in which HBOS, Royal Bank of Scotland, Lloyds TSB, HSBC and National Australia Bank (NAB) would end up owning the majority of its equity in exchange for forgiving the crippling debt bill, run up in April last year as part of an ill-timed plan to return £364 million of capital to shareholders. Mr Duffield sold £155 million of shares but still owns 7 per cent of the group.

New Star has already renegotiated its debt covenants once and has suffered a 90 per cent drop in its share price. Its shares came under renewed pressure yesterday, falling as much as 17 per cent, as it showed little sign of agreeing a deal quickly. With investors fretting about the talks, which would leave them heavily diluted, shares closed 15.52 per cent lower, down 1.24p at 6.75p.

The manager is facing additional difficulties with negotiations as NAB's credit committee, which would be required to sign off an agreement, convenes in Australia, ten hours out of kilter with the UK. NAB declined to comment.

The continued troubles at New Star came as the City suffered another round of job cuts. It is understood that Nomura, the Japanese investment bank that owns Lehman Brothers in Europe, was making London staff redundant yesterday, a day after HSBC and Credit Suisse had revealed plans to shed 1,150 jobs.

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