NEW YORK/WASHINGTON - WASHINGTON Mutual was closed by the US government in by far the largest failure of a US bank, and its banking assets were sold to JPMorgan Chase for US$1.9 billion (S$2.7 billion).

The rescue marks a historic step to clean up a US financial system littered with toxic mortgage debt.

Washington Mutual, the largest US savings and loan, was closed by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. Customers should expect business as usual on Friday, the FDIC said.

The bailout came after the thrift suffered deposit outflows of US$16.7 billion since Sept 15, the OTS said.

'With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,' the OTS said.

Seattle-based Washington Mutual has about US$307 billion of assets and US$188 billion of deposits, regulators said. The nation's largest previous banking failure was Continental Illinois National Bank & Trust, which had US$40 billion of assets when it collapsed in 1984.

The transaction gives JPMorgan roughly 5,400 branches, and fulfills JPMorgan Chief Executive Jamie Dimon's long-held goal of becoming a retail bank force in the western United States.

It comes four months after JPMorgan acquired the failing investment bank Bear Stearns at a fire-sale price.

'Jamie Dimon is clearly feeling that he has an opportunity to grab market share, and get it at fire-sale prices,' said Mr Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. 'He's becoming an acquisition machine.'

On a conference call, JPMorgan said the transaction will add to earnings immediately, and result in US$1.5 billion of annual cost savings, including from the closure of less than 10 per cent of the combined company's branches. He also said JPMorgan plans to issue US$8 billion of stock.

The acquisition does not cover Washington Mutual's equity, senior debt and subordinated debt holders, the FDIC. The FDIC said the transaction will not affect its roughly US$45.2 billion deposit insurance fund.

The transaction also comes as Washington wrangles over the fate of a US$700 billion bailout of the financial services industry, which has been battered by mortgage defaults and tight credit conditions, and evaporating investor confidence.

'It removes an uncertainty from the market,' said Mr Shane Oliver, head of investment strategy at AMP Capital in Sydney.

'The problem is that markets are in a jittery stage. Washington Mutual provides another reminder how tenuous things are.'

Washington Mutual's collapse is the latest of a series of takeovers and outright failures that have transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

These include the disappearance of Bear, government takeovers of mortgage companies Fannie Mae and Freddie Mac and the insurer American International Group Inc, the bankruptcy filing of Lehman Brothers, and Bank of America's planned purchase of Merrill Lynch.

JPMorgan, based in New York, ended June with US$1.78 trillion of assets, US$722.9 billion of deposits and 3,157 branches.

Washington Mutual had 2,239 branches and 43,198 employees.

Shares of Washington Mutual plunged US$1.24 to US$0.45 in after-hours trading after news of a JPMorgan transaction surfaced. JPMorgan shares rose US$1.04 to US$44.50 after hours.

The transaction ends exactly 119 years of independence for Washington Mutual, whose predecessor was incorporated on Sept 25, 1889.

Less than three weeks ago, Washington Mutual ousted Chief Executive Kerry Killinger, who drove the thrift's growth as well as its expansion in subprime and other risky mortgages, and replaced him with Alan Fishman, the former chief executive of Brooklyn, New York's Independence Community Bank.

Washington Mutual's roughly $227 billion book of real estate loans put the thrift at the top of the critical list of US lenders, analysts said. More than half of this portfolio was in home equity loans and in adjustable-rate mortgages and subprime mortgages that are now considered risky.

Thursday's transaction makes JPMorgan close in size to Citigroup, now the largest US bank by assets.

JPMorgan has surpassed Bank of America in size. That bank would become the largest US bank once it completes its planned purchase of Merrill Lynch, expected in the first quarter of 2009. -- REUTERS