Counterparty credit concerns at 6-mth high -index

NEW YORK, Sept 11 (Reuters) - Concerns about the counterparty risk of large banks rose to their highest levels since the bailout of Bear Stearns in March, as the survival of Lehman Brothers Holdings LEH.N was called into question, according to a credit derivative index.

Lehman's shares tumbled and its debt protection costs soared on Thursday as the company scrambled to sell assets to cover losses from toxic real estate investments. For details, see [ID:nN11366713]

Concerns over the health of large banks was not confined to Lehman, with debt protection costs on Merrill Lynch MER.N and Wachovia Corp WB.N also significantly higher.

The CDR Counterparty Risk Index, which measures the average credit spread of the 15 largest credit derivative dealers, jumped 26.5 basis points on Thursday to 208.2 basis points, according to Credit Derivatives Research, which manages the index.

The index is 49.3 basis points weaker on the week.

Lehman's swaps were the weakest performer, widening 136 basis points, while Merrill Lynch and Wachovia widened 71 basis points and 60 basis points respectively, CDR said.

Lehman's credit default swaps reached a record of 775 basis points early on Thursday before retracing to around 650 basis points, according to broker Phoenix Partners Group.

Swaps on Bear Stearns had traded over 800 basis points before the government intervened in March to facilitate its acquisition by JPMorgan. (Reporting by Karen Brettell; Editing by Leslie Adler)