America's Federal Reserve last night orchestrated a rescue takeover of Bear Stearns, the stricken Wall Street investment bank, by JP Morgan Chase in an unprecedented move to prevent the implosion of the US financial system.

In New York last night, JP Morgan Chase announced that it is to buy Bear Stearns for $240 million in shares - representing 6 per cent of the struggling bank's closing market value on Friday, and just 1 per cent of the group's capitalisation at the beginning of the month.

As part of the deal, America's central bank has effectively underwritten $30 billion worth of Bear's toxic sub-prime mortgage-backed bonds, to protect JP Morgan Chase shareholders. It is also providing special financing to JP Morgan Chase - of an undisclosed sum. Terms of the deal are unknown, and it is not clear whether such special financing is to cover the cost of JP Morgan's emergency loan to Bear made late on Thursday night.

The move will draw to a close the 85 years of independence for Bear Stearns, the smallest of Wall Street's banks, and is designed to stem the rising panic in America's banking system as investors, Washington and the Fed feared the collapse of one bank could bring down another.

At the same time last night, the Fed also announced a series of new steps to help provide relief to a spreading credit crisis that threatens to plunge the economy into recession. The central bank approved a cut to its lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans.

The steps are designed to "bolster market liquidity and promote orderly market functioning"; the Fed said in a statement. "Liquid well-functioning markets are essential for the promotion of economic growth," it added. The Fed is also expected to follow this move with a cut to the main borrowing rate tomorrow (Tuesday) by three quarters of a percentage point.

The Federal Reserve, Henry Paulson, the US Treasury Secretary, and bankers at JP Morgan Chase and Bear Stearns, worked round the clock over the weekend to ensure that the future of Bear Stearns was certain by the time the Tokyo markets opened for business today (Monday). It is understood that Mr Dimon and Alan Schwartz, chief executive of Bear Stearns, were under considerable pressure from both the Fed and Washington to secure a deal before the end of the weekend.

However, even with the news of the deal, fears that the rescue deal to buy Bear and a bank lending cut, failed to convince many in Tokyo that funding problems experienced by Bear at the end of last week might not be repeated within another bank. The Nikkei 200 fell 1 per cent as it opened.

Jamie Dimon, chief executive of JP Morgan Chase, last night said his bank is to acquire Bear Stearns for $2 a share in an all paper deal, and has already received approval from Washington and the Federal Reserve Bank to press ahead with the takeover. On Wall Street on Friday, shares in Bear Stearns had closed at $30 each, having almost halved during the day.

The announcement from both the Fed and JPMorgan comes ahead of what some analysts expected to be a brutal day for global stocks. Investors, including Joe Lewis, who has a 9 per cent stake in Bear, will be keen to hear Mr Schwartz later today unveil first quarter numbers and find out more details about the acquisition.

A collapse of Bear Stearns could have created a further crisis of confidence in world financial markets amid a deepening credit crunch - Bear Stearns is one of the world's biggest financial custodians, and would have created havoc in global capital markets had it gone bust.

“The past week has been an incredibly difficult time for Bear Stearns,” Mr Schwartz said in a statement. “This represents the best outcome for all of our constituencies based upon the current circumstances.”

Mr Dimon said in a statement: “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk.”

On Friday, Bear Stearns admitted that it had been forced to borrow two undisclosed sums of capital from the Federal Reserve Bank of New York and from JP Morgan Chase because it feared that it would not be able to fulfill its financial obligations. The two groups offered a secured emergency loan for 28 days.

Meanwhile, investors will be keenly watching first quarter results due this week due from a string of Wall Street heavyweights. Goldman Sachs, the bank which has so far had least exposure to the credit crisis, is tomorrow expected to show that even the strongest are not immune. Goldman is set to reveal write-downs of at least $3 billion from leveraged loans, a fall in value of its private equity portfolio and a drop in the share price of Chinese bank, ICBC, in which Goldman Sachs has a $2.3 billion stake which it is currently not allowed to sell or hedge against. That is expected to lead to a 60 per cent drop in Goldman's profits, to about $2.59 a share, according to analysts.

Lehman Brothers, which closed a $2 billion credit line on Friday as traders cited talk the bank could be the next to run into trouble, is expected to reveal further write-downs of about $1 billion. And Morgan Stanley, is set to unveil another $500 million of credit-related write-downs, on top of the whopping $10.3 billion in already-announced provisions that led the bank to seek outside investment from China last year.

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