NEW YORK — Citigroup Inc. and Morgan Stanley agreed yesterday to combine their brokerages in a deal that shows how much Citigroup wants to slim down and build up cash.

Citigroup’s retail brokerage, Smith Barney, was once the crown jewel in its wealth management business.

The deal comes two weeks after Bank of America Corp. purchased securities firm Merrill Lynch & Co., widening the shakeout on Wall Street from the worst credit panic in seven decades.

Morgan Stanley, led by chief executive officer John Mack, will own 51 percent of a newly formed brokerage joint venture named Morgan Stanley Smith Barney and receives an option to acquire the rest after five years, the companies said in a statement. Morgan Stanley co-president James Gorman, 50, will oversee the venture.

Citigroup, which received $45 billion in U.S. government money last year after recording $20 billion in losses, may also sell its CitiFinancial consumer-lending unit and cut back on trading with the firm’s capital, people familiar with the plan said. The bank will get cash as well as an accounting gain from writing up the value of Smith Barney. The new venture would employ about 22,000 advisers, compared with roughly 20,000 at Bank of America after its purchase of Merrill Lynch.

“Morgan Stanley has experience in the business, and I think it’s a positive for them and a negative for Citi,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $2.5 billion for clients and doesn’t hold either company’s stock. “Citigroup needed the funds, and clearly the government is exerting its power and wants them to raise some capital.”

The deal was announced after the market closed. Shares of Citigroup rose 30 cents, or 5.4 percent, to $5.90 yesterday, and Morgan Stanley shares rose 7 cents to $18.86.

Citi CEO Vikram Pandit has been saying for months that he plans to sell assets to raise cash, but the executive, according to media reports, is getting ready to announce that Citigroup is abandoning the financial “supermarket” model. That term described the aim of Citigroup — created over the last couple decades by former CEO Sandy Weill — to service all of individuals’ and businesses’ financial needs, from saving to borrowing to investing to deal-making.

Citigroup has fared worse than other banks in recent years, particularly during the recent credit crisis. The New York-based company is expected to post a fifth- straight quarterly loss next week. The government has already lent it $45 billion — more than other large banks received — and agreed to absorb losses on a huge pool of Citigroup’s mortgages and other soured assets.

Some investors say Citigroup is headed for a larger-scale breakup now that the government is involved and that President-elect Barack Obama is rethinking how to dole out the remaining $350 billion of bailout money.

The new administration could “come to the realization that the whole economy does not hinge on the banks,” said Octavio Marenzi, head of financial consultancy Celent. “Banking is important. The banks themselves are not.”

William Smith, of Smith Asset Management, who still owns shares of Citigroup, has been calling for a breakup of Citigroup for years and says the government will force that fate, in piecemeal fashion, over the coming year.

“I think within 12 months, Citigroup no longer exists,” Smith said. “The new CEO of this company is the government.”

With Bloomberg News reports