NEW YORK, March 14: In an unprecedented move JPMorgan Chase & Co (JPM) and the Federal Reserve Bank of New York stepped in with emergency funds to keep beleaguered investment bank Bear Stearns Cos (BSC) afloat as the stocks tumbled on Friday afternoon.

The rescue move came after news that Bear Stearns is taking emergency funding exacerbated fears that the financial firm is in a liquidity crisis, a Dow Jones news report said.

The Dow Jones industrial average lost 1.6 per cent roughly three hours into the session. The broader Standard &

Poor’s 500 index and the Nasdaq composite both lost close to 2 per cent.

Earlier on Friday morning in a speech in New York Friday US President Bush acknowledged that the country was facing challenges both in the housing and financial markets, but said that the strength of the underlying economy would help it manoeuvre through this difficult period.

Speaking before The Economic Club of New York, Bush said he was confident that the government action take so far would help get the economy back on track.

“Theses are tough times,” he said.

But Mr Bush’s tough remarks failed to infuse any confidence in the market which continued to roll down.

The JPMorgan Chase move, after a week of persistent concerns about whether Bear could continue to meet its obligations, took the credit crisis to a new, more serious stage and was a reminder of how quickly an erosion of confidence can undermine even leading financial institutions.

The involvement of the Federal Reserve Bank -- coordinating with the Treasury Department and the Securities and Exchange Commission -- made clear authorities were concerned about the risks to the broader financial system.

Bear is the smallest of Wall Street’s big five investment banks, but it is a significant player in markets for debt, particularly for securities backed by mortgages.

A sharp sell-off in the bank’s stock and demand for protection against a default on its debts showed the market isn’t convinced the plan will stabilise the bank, which now faces the prospect of fighting to convince customers to stick around or finding a merger partner, Dow Jones newswire said.

Bear Stearns’ problems built this week, as counterparties in the market grew extra cautious about entering deals with the bank. Executives tried all week to reassure markets that the bank’s financial position was solid. But in a week that also saw the collapse of the $22 billion, mortgage-focused hedge fund Carlyle Capital, those reassurances went unheard, and Bear ultimately was forced to seek help.

“We have tried to confront and dispel these rumours and parse fact from fiction,” CEO Alan Schwartz said in a press release. “Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

JPMorgan will borrow funds from the Fed’s Discount Window and re-lend them to Bear Stearns for 28 days, with the Fed bearing the risk of any losses. The size isn’t predetermined, but is limited by the available collateral.

The arrangement employs a little-used Depression-era provision of the Federal Reserve Act. New York-based JPMorgan, unlike investment banks like Bear, has the advantage of being able to borrow directly from the Discount

Window and, with just over $3 billion in write-downs thus far, has weathered the credit crisis far better than commercial banking peers like Citigroup Inc. (C), the Dow Jones news report said.

The timing of the move made its urgency clear: If Bear could have held out until March 27, it could have borrowed directly from the Fed itself under a new program announced just Tuesday.

The developments could mean the end of independence for Bear, founded in 1923. JPMorgan is “working closely with Bear Stearns on securing permanent financing or other alternatives for the company” - Wall Street lingo for a sale or other strategic-level change - and CNBC reported that the bank is “actively being shopped” to potential buyers.

The cost of protecting investments in Bear Stearns debt against default jumped sharply, indicating growing concerns about Bear’s creditworthiness.

Similar protection for other financial companies also rose in value, a sign of rising worry in the markets.

Bear’s shares plunged, dropping by more than half at the day’s low.

Shares recently were trading nearly 37 per cent lower at $36.11, knocking around $3 billion in market value off the stock. The options market signalled a dim outlook, with contracts giving the right to sell Bear Stearns stock for $25 soaring in value. The shares have fallen by two-thirds in the past three months.

The news also unnerved the broader markets, which just on Thursday were cheering a report from Standard & Poor’s that suggested the end might be in sight for write-downs related to subprime mortgages. The Dow Jones Industrial Average was down about 300 points at its low and recently was off 170 points at 11979.

The intervention by JPMorgan and the New York Fed shows Bear “didn’t have enough money to turn the lights on this morning,” Carl Lantz, strategist at Credit Suisse told DJ wire. “And in a big picture sense, this isn’t that comforting.”

US Treasury surged, as investors sought a safe place for their money, and the dollar fell.

“It’s just pure fear across the board right now,” said Geoffrey Yu of UBS. “All the promising news this past week has been undone over this Bear Stearns news....I don’t think the market has seen anything of this magnitude before, such a big bank.”