UPDATE 2-VIX vaults over 30 at fresh 5-year highs

(Updates with quotes and VIX close)

By Doris Frankel

CHICAGO, March 17 (Reuters) - The Chicago Board Options Exchange Volatility Index .VIX, Wall Street's favorite fear barometer, finished at five-year highs on Monday, reflecting more uncertainty about how far the credit crisis might go after JPMorgan's fire sale deal to buy Bear Stearns BSC.N.

Analysts said the so-called fear gauge is expected to stay elevated during this holiday shortened week -- a sign that wary investors are hedging their bets ahead of several key events, including a Federal Reserve meeting on interest rates.

"Traders are worried about the problems in the credit markets and the risk of a more dramatic economic slowdown," said independent options trader Frederic Ruffy.

The VIX rose 3.47 percent to finish at 32.24, its highest close since March 2003, after posting an intraday high of 35.60, its best level since late January.

The options gauge, which measures projected stock market volatility conveyed by near-term Standard & Poor's 500 index .SPX option prices, typically runs counter to the S&P benchmark, which ended lower at 1,276.60.

"The VIX certainly rallied at the close as there is still so much concern about the stock valuations of firms in the financial industry," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Inc in Chicago.

"No one is quite sure what the valuations are and worst case scenario is being assumed by the market, causing fear and where there is fear, there is increased volatility," Kinahan added.

The financial sector was hammered in Monday's volatile session after the Fed backed a deal by JPMorgan Chase & Co (JPM.N) to buy investment bank Bear Stearns for $2 a share.

Many investors are now focusing on the central bank, which will meet on Tuesday to decide interest-rate policy.

Faced with a credit crisis and an economy that may be mired in recession, the Fed looks set to cut interest rates sharply in an effort to avert a possibly sharp downturn.

"The worry is that tomorrow's expected rate cut and the pledges of liquidity won't put an end to the financial crisis," Ruffy said. "If not, that also puts the economy at greater risk."

Wall Street also is watching several big U.S. investment banks, including Lehman Brothers LEH.N and Goldman Sachs (GS.N), which are scheduled to report quarterly results on Tuesday.

Lehman's projected volatility, the expected magnitude of stock price movement conveyed by its option prices, rose substantially as fretful investors wait for the earnings to help clarify the extent of the credit problems, analysts said.

Lehman puts and calls traded five times the average volume "as liquidity concerns mount for the broker dealer following the rapid fall of Bear Stearns," said Michael McCarty, options strategist at broker-dealer Meridian Equity Partners in a note to clients.