UPDATE 1-NY-NJ Port Authority to exit auction-rate market

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NEW YORK Feb 21 (Reuters) - The New York-New Jersey Port Authority on Thursday said it will redeem $200 million of auction-rate paper and exit this market in six to eight weeks after rates briefly spiked as high as 20 percent.

Numerous auctions of this type of debt have failed since late January because investors were spooked by bond insurers' problems and dealers stopped supporting the auctions.

This has forced many issuers to pay high penalty rates. For example, the rates on $100 million of the Port Authority's auction-rate paper last week rose to 20 percent from 4.3 percent, agency officials said.

This week, the rates reset at 8 percent -- still almost double the previous rates. Hedge funds and wealthy individuals have been big buyers this week, eager to capture such unusually high interest rates.

"We began the process of redeeming about $200 million of versatile structure obligations that we have outstanding," Anthony Shorris, executive director, told reporters.

"We'll do that in an orderly process. Our expectation is that we will be out of this instrument in six to eight weeks."

The authority has about $700 million of auction-rate paper outstanding. The $200 million it will redeem will be replaced with commercial paper, Shorris said.

Its auction-rate paper was insured by Financial Security Assurance (DEXI.BR) and MBIA Inc (MBI.N). (Reporting by Anastasija Johnson; editing by ; Editing by Tom Hals)