GLOBAL MARKETS-Global stocks fall on Bear Stearns rescue

(Add midday market data)

By Herbert Lash

NEW YORK, March 14 (Reuters) - An emergency funding plan for cash-strapped brokerage Bear Stearns BSC.N on tripped up global equity markets on Friday and boosted bonds already jittery over the impact of a widening credit crunch.

The stock of Bear Sterns, one of Wall Street's biggest firms, lost nearly half its value and dragged other financial stocks lower with it. Trading overall was volatile as investors tried to absorb the stunning news of an unusual investment bank rescue involving the Federal Reserve.

"People are starting to talk about whether this (Bear Stearns) is a signal of a systematic problem in the U.S. banking sector, and that's why we're seeing selling of dollars across the board," said Greg Salvaggio, a currency trader at Tempus Consulting in Washington.

Unsettled investors piled into the relative safety of U.S. Treasuries as equity markets turned sharply lower. Bond yields dropped sharply as some investors speculated the Fed will now cut interest rates more sharply when policy-makers meet next week.

The dollar fell to a fresh 12-1/2-year low against the yen and another record low against the euro amid persistent fears the U.S. economy is in for a long recession and its interest rate differential with Europe will widen.

U.S. rate futures now point to a growing chance of a 1 percentage point cut at Tuesday's Fed meeting.

"This tells you we're not over the worst yet, and there are still some players out there who are vulnerable," said Stephen Dowds, head of international equities at Northern Trust in London.

The Dow Jones industrial average .DJI was down 1.71 percent at 11,938.22, the Standard & Poor's 500 Index .SPX was off 2.11 percent at 1,287.72 and the Nasdaq .IXIC was down 2.26 percent at 2,212.38 in early afternoon trading.

The initial announcement that JPMorgan Chase would provide financing to Bear Stearns lifted European shares and U.S. index futures, on the view that a white knight had stepped up.

But traders soon focused on additional statements that the firm's cash position had deteriorated and the Federal Reserve Bank of New York also was part of the emergency funding plan.

The plunge in Bear Stearns shares roiled other financial stocks. Lehman Brothers Holdings Inc LEH.N fell 10 percent, Citigroup lost 4 percent and Morgan Stanley (MS.N) 3 percent.

The fifth-largest U.S. investment bank has long been considered one of the institutions hardest hit by a credit crisis that has hammered financial markets for months, a suspicion that appeared validated by the day's developments.

Bear Stearns said its cash position had deteriorated significantly over the past 24 hours. It said the funding was arranged to restore investor confidence, strengthen the bank's liquidity and to allow it to continue normal operations. Its shares were down 36 percent at $37, after falling as low as $28.42.

The FTSEurofirst 300 index .FTEU3 closed unofficially down 0.95 percent at 1,256.37 points.