Investment bank Morgan Stanley has suspended a senior trader on its London dealing floor after finding positions on its books were improperly marked up by $120m (£61m).

The alleged rogue trader is an executive director in a department dealing in interest rates, currencies and credit instruments.

Morgan Stanley, which says it has "zero tolerance" for such behaviour, has told the Financial Services Authority and begun an internal investigation.

"The firm became aware of marks in a London-based trader's books that were inconsistent with our policies," said a bank spokesman. "The trader was immediately suspended. We informed the FSA and are conducting a full internal review."

Morgan Stanley took a $120m write-down to cover the liability in its quarterly results yesterday. Global profit slumped 60% to $1.02bn as it was buffeted by the credit crunch - in spite of a $698m gain from selling a business in Spain.

The errant trader, who has not been named, has worked at the bank for four years and is one rank below managing director. People of this level are often well experienced and in their mid to late 30s.

Chief financial officer Colm Kelleher told Wall Street analysts internal controls uncovered the mis-marks. "We did not think it was material but we certainly thought it was time to disclose it to people and [send] a very strong message that we hold zero tolerance on this sort of behaviour," he said. "I do believe it is isolated."

Unusually high volatility in credit markets has made it more complicated for banks to value trading positions in recent months. Insiders say certain instruments have no transparent market price because there is little buying and selling of them.

Investment banks do, however, have guidelines for their traders on how to calculate indicative valuations in such circumstances. The suspended trader has been accused of failing to follow these.

Although embarrassing, the liability is small in comparison with losses run up in other rogue trader cases - in January, Société Générale's Jerôme Kerviel was accused of losing €4.9bn (£3.9bn).

Morgan's shares slid 3.2% to $39.30 in early New York trade. The bank's revenue dived 38% to $6.5bn as it proved less resilient than rival Goldman Sachs, which reported strong numbers on Tuesday.