UPDATE 3-Morgan Stanley CEO Mack to be replaced by Gorman

* James Gorman to replace Mack as CEO

* Resignation would follow string of recent losses

* Chammah named chairman of Morgan Stanley International (Adds additional background, comment)

NEW YORK, Sept 10 - Morgan Stanley Chief Executive John Mack is stepping down following a string of losses and will be replaced by co-President James Gorman in a sign of the firm's growing emphasis on its retail brokerage.

Mack, 64, who rose to power after an internal coup toppled his predecessor, will remain as chairman of Morgan Stanley, which posted a second-quarter loss of $1.26 billion even as other banks showed stronger results.

Gorman will take over the CEO job -- and join Morgan Stanley's board -- effective Jan. 1, 2010.

Mack had told the bank's board that he planned to step down from the CEO post when he turned 65 in November, the bank said in a statement on Thursday.

Morgan Stanley's shares have come roaring back this year after it fought for survival in the wake of the Lehman Brothers collapse, helped by the U.S. government and an investment from Japanese bank Mitsubishi UFJ that Mack took the lead in negotiating.

Still, the shares, which are up nearly 80 percent so far this year, have fallen short of a 107 percent surge in archrival Goldman Sachs Group Inc's stock.

Gorman, 51, who runs Morgan Stanley's brokerage and has been overseeing its expansion through a joint venture with Citigroup's Smith Barney unit, has long been seen as a front runner for the top job at Morgan Stanley.

"Gorman has really earned his stripes," said Anton Schutz, president of Mendon Capital Advisors in Rochester, New York, which owns Morgan Stanley shares. "He did a great job at Merrill, he's doing a good job at Morgan Stanley, and the timing for a change seems to be good, because we've made it through the worst of the crisis."

Morgan Stanley earlier this year paid $2.75 billion to acquire a controlling stake in Citi's Smith Barney retail brokerage, a move that could provide a more stable source of revenue to offset some of the investment bank's more volatile businesses.

Prior to joining Morgan Stanley in 2006, Gorman had held a series of positions at Merrill Lynch & Co, including leading its global private client business from 2001 to 2005.

Walid Chammah, another Morgan Stanley co-president who had also for a time been a candidate for the top job, was named chairman of Morgan Stanley International. Chammah had expressed a desire to stay in London, the bank said.

While Mack was popular with many within Morgan Stanley, many investors had grown restless with his management, which saw the bank embrace risk in the months preceding the credit crisis that shook Wall Street last year.

More recently, the bank was lambasted by some on Wall Street for retreating from risk after the worst of the crisis blew over. At the same time, rivals like Goldman and JPMorgan Chase & Co seized trading opportunities.

"Mack made some missteps, but he did remove silos at Morgan Stanley and make it one company, and he hired Gorman, which was huge," Schutz said. "There were some missteps, but he didn't end up going the route of Bear or Lehman, either."