London traders told stop dealing with Bear: sources

LONDON (Reuters) - Financial market traders across London have been told by their firms to stop dealing with Bear Stearns, sources in several dealing rooms said on Friday.

At least six major institutions in London -- including Commerzbank, Royal Bank of Scotland and JPMorgan -- had stopped giving prices to the U.S. bank, a credit trader at one European institution in London, who declined to be identified, told Reuters.

Credit Suisse had also stopped trading with Bear Stearns, a London-based equities broker said.

None of the institutions named by the traders would comment on the subject when contacted by Reuters.

A London-based government bond trader said banks had been withdrawing from transactions with Bear Stearns since Thursday.

But the London Metal Exchange said that Bear Stearns remains entitled to trade on its electronic trading system Select.

"For as long as Bear Stearns remains a member of the LME and in good standing at the LME's clearing house, LCH. Clearnet, Bear Stearns will remain entitled to trade on LME Select," the LME said in a note circulated to its clearing members.

JPMorgan Chase & Co and the Federal Reserve Bank of New York on Friday agreed to provide emergency financing to Bear Stearns after the investment bank said its cash position had deteriorated sharply, sending its shares into freefall.

Stock of the fifth-largest U.S. investment bank dropped as much as 50 percent in morning trading after the news, the latest in the Fed's efforts to soothe financial markets in response to a widening credit crisis spurred by rising mortgage defaults.

Bear Stearns has more exposure to the U.S. bond markets than its competitors, and has a large mortgage-backed securities business. It was among the first to disclose the impact of the subprime mortgage market meltdown when two of its leveraged hedge funds collapsed last summer, losing $1.6 billion.

Counterparty risks have been steadily rising among the world's major financial institutions for months, distorting prices and leading to fears that other institutions could find themselves unable to trade securities they need to survive.

"You can safely assume that Bear is not alone here," said an interest rate strategist at one European investment bank in London, who declined to be identified.

"We have been setting prices in swaps markets in recent days that were designed to say 'no deal' and at least one other U.S. investment bank -- not Bear -- dealt. That is very worrying if they needed the cash that badly. We have been forced to review our counterparty limits ever since."

(Reporting by Natalie Harrison, Christina Fincher, Mike Dolan and Anna Stablum in London and Peter Starck in Frankfurt; writing by Nick Edwards)