Jan. 19 (Bloomberg) -- Morgan Stanley took a $600 million gain and cut its exposure to so-called peripheral European countries by more than half by restructuring a derivative deal earlier this month.

The transaction reduced the New York-based firm’s risks before hedges by $3.38 billion, by lowering net counterparty exposure related to Italian sovereigns, Morgan Stanley Chief Financial Officer Ruth Porat said today in an interview.

The $600 million gain accounted for about half the bank’s fixed-income trading revenue in the fourth-quarter, excluding a charge related to a settlement with MBIA Inc. and accounting gains tied to the firm’s own credit spreads.

“We had a derivative contract, and we mutually agreed to restructure it,” Porat, 54, said. “In prior periods we had taken a credit-valuation allowance, so we reversed that in the fourth quarter.”

Morgan Stanley, the sixth-biggest U.S. bank by assets, had $6.4 billion of net exposure including unfunded lending to the five peripheral countries -- Greece, Ireland, Italy, Portugal and Spain -- including $4.9 billion to Italy, as of Dec. 31, according to a disclosure on its website today. After the restructuring settled on Jan. 3, those amounts dropped to $3.1 billion and $1.5 billion, respectively.

Concern that Europe’s debt crisis would spark bank losses contributed to a 41 percent tumble for Morgan Stanley’s shares in the third quarter. The firm said in October that its net exposure to the five troubled nations was $3 billion including unfunded loans as of Sept. 30, helping to stabilize the shares.

--Editors: Steve Dickson, William Ahearn

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net