Bank of America, JPMorgan, lead bank rally

Bank of America and JPMorgan shares closed up more than 6 percent and 13 percent, at $20.87 and $41.64, respectively, in late afternoon trading. The shares of Citigroup Inc , which withdrew its bid on Thursday to buy struggling regional bank Wachovia Corp , also closed higher at $14.11, or up about 9 percent.

But Morgan Stanley and Goldman Sachs, which recently converted to bank holding companies to boost deposits and calm investor concern about their funding sources, saw their share prices fall some 22 percent and 12 percent, respectively.

Analysts and investors attributed the rise in other financials to short covering, as investors bought up shares believing government action to stabilize Morgan Stanley and the rest of the market may be possible this weekend.

"I'd be surprised if people would want to be short financials going into the weekend," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank Private Wealth Management in New York.

Others noted a slight easing in the commercial paper market, which is crucial for bank funding, as a possible reason for the boost in bank shares.

"There's so much anxiety within the financial system that any good news could set the stage for a dandy rally," said David Rolfe, chief investment officer at Wedgewood Partners, in St Louis, Missouri.

Merrill Lynch & Co Inc , which agreed last month to sell itself to Bank of America, rose from a year low set on Thursday to $15.75, up more than 18 percent.

At this level, the shares are trading at a 14 percent discount to the price implied by Bank of America's offer, which suggests some doubt the deal will go through. Analysts, however, believe Merrill would struggle to survive on its own.

"Given what's happened with Morgan Stanley today, I cannot see under any circumstance that Merrill would try to walk away from this deal ... nor do I think that (Bank of America Chief Executive) Ken Lewis will try to renegotiate," said Nancy Bush, analyst at NAB Research.

(Reporting by Elinor Comlay and Kristina Cooke; Editing by Tim Dobbyn and Andre Grenon)

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