UPDATE 4-Bear Stearns bails out hedge fund

(Adds details, information from conference call, background)

By Dan Wilchins

NEW YORK, June 22 (Reuters) - Bear Stearns Cos. Inc. BSC.N on Friday said it would provide up to $3.2 billion in financing for a struggling hedge fund it manages, raising concern about other funds that invested in bonds linked to subprime mortgages.

The biggest bailout since Wall Street's 1998 rescue of Long-Term Capital Management signaled that the funds' main investments -- a type of bond known as a collateralized debt obligation (CDO) -- may be riskier than previously reckoned.

"The big worry is: Are there other funds like this out there? Are whole markets going to seize up?" said James Ellman, president of financial services hedge fund Seacliff Capital, adding that he thought concerns were overblown.

Analysts said in the worst-case scenario, the stock market could broadly decline as companies could face higher borrowing costs and leveraged buyouts could grow less attractive.

On Friday, investors sold stocks, driving the major averages down more than 1 percent, and bought safer U.S. Treasury bonds. Bear Stearns' shares fell 1.4 percent, or $2.06, to close at $143.75 on the New York Stock Exchange.

Bear Stearns, the fifth-largest U.S. investment bank, said it would provide secured financing to its High-Grade Structured Credit Strategies Fund so the fund can sell assets in an orderly fashion.

Bear also said a second fund that took greater risk is still working out a restructuring plan with creditors.