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The bank's shares rose 3.5 percent, even as the bank posted a nearly 50 percent decline in earnings.

Revenue in bond trading, long a troubled business for the bank, fell 35 percent from the same quarter last year, which was an unusually strong quarter across Wall Street.

"Morgan Stanley definitely still has a lot of work to do on revamping the fixed income trading desk. But this quarter is a testament to the progress they've made," said Shannon Stemm, a stock analyst at brokerage Edward Jones.

The bond trading business generated big losses for the bank during the financial crisis, and then lagged rivals during a recovery in 2009.

Chief Executive James Gorman is pushing the division to gain market share and improve its performance.

In an interview with Reuters Thursday morning, Chief Financial Officer Ruth Porat said the division performed well in trading currencies and interest rate products like government debt, two key areas for Morgan Stanley's turnaround effort.

"We're making progress," she said.

She attributed the decline in overall fixed-income trading to weak client volumes in areas like corporate bond trading.

Overall, Morgan Stanley posted quarterly net income for shareholders of $736 million, or 50 cents a share, down from $1.41 billion, or 99 cents a share, a year earlier. Revenue fell 16 percent to $7.6 billion.

Some businesses performed well. The wealth management group, a joint venture with Citigroup Inc, posted income for Morgan Stanley of $183 million, up 85 percent. The group reported 7 percent growth in client assets.

The bank's quarterly results included several special items, including an after-tax loss of 26 cents a share from its stake in a Japanese securities joint venture, and a gain of 30 cents a share linked to selling its stake in a stalled casino project in Atlantic City, New Jersey.

It was not immediately clear how the bank's bottom line compared to the average Wall Street forecast, given the special items and the fact that not all analysts included the Japanese joint venture losses in their forecasts.

Most Wall Street banks have posted weaker fixed income revenue after a blow-out quarter a year earlier. The broad decline across Wall Street may have helped soften the blow for Morgan Stanley.

Goldman Sachs Group Inc posted a 28 percent decline for its fixed income customer trading business, while JPMorgan Chase & Co posted a decline of just 4 percent.

Morgan Stanley shares were up 91 cents to $26.95 in morning trading.

(Reporting by Lauren Tara LaCapra, additional reporting by Dan Wilchins; editing by John Wallace)

* By 4:44 a.m., futures for the S&P 500, for the Dow Jones industrial average and for the Nasdaq rose 0.4 to 0.9 percent.

* Earnings surprises lifted stocks on Wall Street to their best day in a month on Wednesday.

*The Dow .DJI rose to its highest in almost three years and the S&P 500 .SOX broke decidedly above its 20-day moving average, setting a near-term target at 1,340, according to its Bollinger bands chart, a technical indicator that tracks momentum and volatility.

* Continuing the upbeat mood after markets closed, iPhone-maker Apple Inc (AAPL.O) posted results that surged past analysts' forecasts.

* Further earnings are expected to dominate the trading session, with bellwether General Electric (GE.N) and lender Morgan Stanley (MS.N) among the major firms scheduled to release results before markets open.

* GE's profit is expected to rise to 28 cents per share from 21 cents per share one year ago, while Morgan Stanley is seen posting earnings of 34 cents, down from $1.03 a year ago.

* Hamburger chain McDonald's (MCD.N) will also report earnings, with focus likely to be on its power to raise prices as food and fuel costs climb. Analysts expect a 2 percent rise in March sales at established U.S. restaurants.

* Economic data is also likely to provide direction for equities in the last day of trading of the week ahead of the Good Friday holiday.

* Weekly jobless claims are due at 1230 GMT, while February home prices data and the Philadelphia Fed's index of business conditions for the U.S. Mid-Atlantic region for April are both due at 1400 GMT.

* In company news, BP (BP.N) has filed a lawsuit against Halliburton (HAL.N), the company that cemented the blown-out well which caused the Gulf of Mexico oil spill, a day after claiming $40 billion from rig owner Transocean (RIG.N).

* Italian automaker Fiat SpA (FIA.MI) has agreed to pay $1.27 billion euros for another 16 percent stake in U.S. peer Chrysler this quarter, the Italian automaker said on Thursday, in a deal that was faster and cheaper than expected.

* Schneider Electric SA's (SCHN.PA) chief executive essentially ruled out a takeover of Tyco International Ltd (TYC.N) by saying the French engineering giant does not plan any purchases larger than a "few billion euros" over the next year.

* In Europe, the pan-European FTSEurofirst 300 .FTEU3 index of top shares edged higher in early trade, with technology shares gaining on the back of Apple's upbeat results.

* Dollar weakness continued to underpin commodity prices, with gold hitting record highs for the fifth day as the dollar index slipped to a three-year low.

(Reporting by Harpreet Bhal; Editing by Jon Loades-Carter)