** Investment bank Jefferies' JEF.N shares fall 3% to $37.13

** Morgan Stanley downgrades JEF to "equal-weight" from "overweight"; slashes PT to $49 from $78, still implying a 28% upside to stock's last close

** Morgan Stanley cites elevated uncertainty around credit risk and legal risk for downgrade

** Western Alliance WAL.N on Friday filed a lawsuit against JEF for not completing a payment of $126.4 million it owed the regional lender; JEF says WAL lawsuit is "without merit"

** Morgan Stanley also cited JEF's exposure to collapsed UK mortgage lender Market Financial Solutions

** "In our view, the key legal uncertainty with JEF/WAL is whether the forbearance agreement takes precedence over the non-recourse terms of the loan" - Morgan Stanley

** Four of six brokerages rate the stock "buy" or higher and two "hold"; median PT is $71 - data compiled by LSEG

** As of last close, JEF stock down 38% YTD

(Reporting by Arasu Kannagi Basil in Bengaluru)

((ArasuKannagi.Basil@thomsonreuters.com;))