US investment bank Bear Stearns said today it had been forced into a funding bail-out after a cash crisis for the business worsened in the past 24 hours.
In a move which raises the spectre of crisis-hit mortgage lender Northern Rock, the firm will access funds from fellow investment bank JP Morgan Chase and the US Federal Reserve for an initial period of up to 28 days.
Bear Stearns blamed "market chatter" for its deteriorating liquidity position, and said the cash injection would allow it to continue normal operations.
The bail-out worsened fears over the impact of the credit crunch on the global banking system and sent stock markets in London and New York plunging into the red.
The company's shares had fallen almost 20 per cent in the past week as doubts over its funding position spread through the markets.
Chief executive Alan Schwartz said: "Bear Stearns has been the subject of a multitude of market rumours regarding our liquidity."
The bank, which has 14,000 staff and a base in London, said it was in talks with JP Morgan over "permanent financing or other alternatives" - likely to include a takeover.
But it gave no guarantees that any alternatives for the business would be successfully completed, sending its shares plunging by almost half as investors feared the worse.
The news comes just a day after the head of the US Federal Reserve, Henry Paulson, called on Wall Street banks to boost their cash reserves to weather the worst storms of the credit crunch.
Bear Stearns was an early victim of the financial turmoil in June last year when two of its hedge funds heavily exposed to mortgage-backed investments collapsed after nervous investors called for their money back.
Banks remain nervous about lending funds to each other because of potential losses, causing money markets to freeze up.
The rate at which banks lend to each other for three months reached its highest point this year today - 5.93% - almost three-quarters of a percent above the Bank of England's 5.25% base rate.
It was this liquidity crisis in money markets which caused the woes of Northern Rock, which was nationalised in February.