Stocks sink as Bear Stearns reignites credit fears

NEW YORK (Reuters) - U.S. stocks tumbled on Friday as an emergency rescue of Bear Stearns orchestrated by the Federal Reserve revived fears about a deepening global credit crunch, triggering a massive sell-off in shares across the board.

Stocks plummeted after the New York Fed and JPMorgan Chase & Co (JPM.N) stepped in with short-term financing for Bear Stearns Cos BSC.N., the fifth-largest U.S. investment bank. Before the opening bell, Bear Stearns shocked Wall Street when it said its cash position had unraveled in the past 24 hours.

Bear Stearns stock sank as much as 50 percent before closing down 45.9 percent at $30.85. The Standard & Poor's financial index .GSPF fell 4.1 percent as investors feared a massive unwinding of Bear Stearns investments could trigger a financial calamity.

"It's a crisis of confidence. Who would have ever thought that Bear Stearns would basically have a bank-type run on it when their balance sheet at one time was relatively healthy?" said Richard Steinberg, president and chief investment officer of Steinberg Global Asset Management Ltd. in Boca Raton, Florida.

Sentiment was further eroded as the U.S. dollar plunged to a record low against the euro and fell below 99 yen for the first time in 12-1/2 years, while the price of heating oil climbed to a record $3.68 a gallon.

Exposure to the escalating housing crisis prompted Moody's Investors Service to downgrade the debt of Washington Mutual (WM.N) to one notch above junk status.

The Dow Jones industrial average .DJI dropped 194.65 points, or 1.60 percent, to end at 11,951.09. The Standard & Poor's 500 Index .SPX shed 27.34 points, or 2.08 percent, to 1,288.14. The Nasdaq Composite Index .IXIC slipped 51.12 points, or 2.26 percent, to 2,212.49.

Although all three indexes finished the day sharply lower, they did trim some of their losses from their session lows in morning trading when the Dow was down 2.5 percent, the S&P 500 was down 2.8 percent and the Nasdaq was down 2.6 percent.

Friday's losses wiped out much of Tuesday's gains when the market enjoyed its best day in five years following the Fed's move to expand a lending program and accept a broader base of securities -- including mortgages bonds whose value has dropped -- as collateral.

For the week, though, the Dow managed to finish with a gain of 0.5 percent, while the S&P 500 fell 0.4 percent and the Nasdaq was unchanged.

Bear Stearns Chief Executive Alan Schwartz said in a conference call at midday that concerns among customers and lenders got to the point where a lot of people wanted to get their cash out. Before the opening bell, the firm said its liquidity position had deteriorated significantly in the last 24 hours.

Top drags included shares of Lehman Brothers Holdings LEH.N, which fell 14.6 percent to $39.26; Citigroup Inc (C.N), which slid 6 percent to $19.81, and JPMorgan Chase, which lost 4.1 percent to $36.54 on the New York Stock Exchange.

Washington Mutual plunged 12.9 percent to $10.57.

After the news about Bear Stearns, U.S. interest-rate futures showed the market fully expects that the Fed -- the U.S. central bank -- will cut short-term benchmark interest rates by 75 basis points, or three-quarters of a percentage point, at its scheduled rate-setting meeting on Tuesday.

This would bring the federal funds rate target down to 2.25 percent from the current 3 percent, following cuts by the Fed totaling 2.25 percentage points since mid-September.

The credit woes overshadowed earlier tame inflation data. The U.S. Labor Department said cheaper transportation and energy costs helped keep consumer prices in check in February after a period of run-ups that had heightened concern over inflation.

Exxon Mobil (XOM.N) fell 1.3 percent to $85.91 as the price of oil edged down from Thursday's jump to a record price of $111 a barrel.

Trading was active on the New York Stock Exchange, with about 1.86 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.51 billion shares traded, above last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of 5 to 1 and on the Nasdaq, by more than 3 to 1.

(Editing by Jan Paschal)