The US Federal Reserve scrambled to shore up nerves on Wall Street in the wake of Bear Stearns' financial crisis last night by announcing a series of emergency measures to make it easier for banks to access funds.

In a rare intervention on a Sunday evening, the Fed said it was cutting the discount rate on its loans to banks by a quarter of a percentage point to 3.25%. Furthermore, the central bank said it was setting up a new lending facility for primary dealers on the financial markets.

"Liquid, well-functioning financial markets are essential for the promotion of economic growth," the Fed said.

The US authorities are alarmed at the prospect of Bear Stearns' difficulties sapping already shaky confidence among market participants. There was a sense of shock at the speed with which one of Wall Street's biggest brokerages lurched to the brink of collapse.

Such is the level of official concern that the Fed agreed to stand behind $30bn (£14.8bn) of Bear Stearns' liabilities in order to persuade JP Morgan Chase to rescue the 85-year-old firm.

Described as "less liquid assets", these liabilities amount to most of Bear's $33bn in exposure to mortgage-backed securities - including $2bn of positions in sub-prime home loans.

On a conference call, JP Morgan's chief financial officer, Mike Cavanagh, said his firm had needed this reassurance before bailing out Bear Stearns. "In doing our due diligence, one of the areas we needed comfort on was some of these illiquid assets on their balance sheet," said Cavanagh.

The deal, which will take 90 days to complete, is contingent on approval from shareholders in both firms. But JP Morgan's head of investment banking, Bill Winters, said that in the meantime Bear Stearns would be operating as usual.

"Bear Stearns is open for business today with all the credit backing we can provide and obviously intends to remain fully active in the market up to and through the date of closure of the transaction."

JP Morgan will hold talks with credit rating agencies in the hope of securing an investment-grade rating for Bear Stearns' debt. JP Morgan has told its own investors that the buyout will ultimately add $1bn of earnings annually.

Many of Bear Stearns' 14,000 staff will be out of pocket over the deal. The firm's management has encouraged an unusually high level of staff share ownership.

The rock-bottom price amounts to a huge financial debacle for the British-born billionaire Joe Lewis, who paid some $960m for an 8% stake in Bear Stearns at the end of last year. His shares will be worth barely $18m under the takeover.

Executives worked around the clock to find a way to escape bankruptcy and staff worked work through the weekend compiling lists of clients, liabilities and pending transactions for potential bidders. As well as JP Morgan, the private equity firms JC Flowers and Kohlberg Kravis Roberts held talks about a joint offer.

Bear Stearns' difficulties began a week ago, when rumours began to circulate that it was short of liquidity. By Thursday, trading partners began to refuse to do business and customers were withdrawing money, prompting Bear Stearns to plead for a temporary cash lifeline backed by the Fed.

Bear Stearns' chief executive, Alan Schwartz, handled the bank run without the firm's veteran chairman, Jimmy Cayne, by his side. Cayne, 74, was in Detroit competing at the North American Bridge Championships when customers began removing funds on Thursday. He finished fourth in a field of 130, but his ranking dived to 26th on Friday, according to the championship's website - possibly because he was distracted.

As the market absorbs the news of Bear Stearns' rescue, eyes will turn to the Fed's rate-setting meeting tomorrow. Analysts at Citigroup have suggested the central bank may drop rates by a full percentage point. As Wall Street's problems seep into the consciousness of the broader public, Democrats are seeking to pin the blame on the White House.

"This has become the Bush recession," said Charles Schumer, a Democratic senator from New York who compared the present administration to the regime during the Great Depression. "The president's hands-off attitude is reminiscent of Herbert Hoover."