NEW YORK (Reuters) - JPMorgan Chase & Co posted a smaller-than-expected drop in earnings on resilient stock and bond underwriting revenue, lifting its shares 11 percent, but the company cautioned that the mortgage market and the economy are getting worse.

The bank's second-quarter profit fell more than 50 percent to $2 billion, hurt by $1.1 billion in write-downs at its investment bank and charges linked to the bank's acquisition of Bear Stearns.

But even amid write-downs, the third-largest US bank generated stronger than expected results, helped by underwriting and bond trading.

"Things aren't as bad as the market has feared," said Thomas Russo, partner and portfolio manager at Gardner Russo & Gardner in Lancaster, Pennsylvania. The results triggered a broad rally in financial stocks a day after Wells Fargo & Co reported surprisingly strong results that also lifted bank stocks.

JPMorgan chief executive Jamie Dimon has managed to sidestep the worst of the credit crisis that has forced massive write-downs at Wall Street firms.

The third-largest US bank has been benefiting from rivals' weakness and is gaining market share in multiple businesses because of it, chief financial officer Michael Cavanagh said in a conference call with reporters.

The bank is still open to buying a regional bank while the sector is depressed, Dimon said, adding that although accounting rules related to taking on a weak bank's balance sheet make a purchase more difficult, it is still possible.

Dimon sounded some ominous notes in a conference call, saying the bank is prepared for losses on prime mortgages to triple and adding that unlike Wells Fargo & Co, the bank has no plans to boost its dividend.

"We're not going to increase the dividend until we see clear daylight," he said.

But CFO Cavanagh said the pace of deterioration in home equity — a big drag for many banks — is slowing. And other businesses are looking up — investment banking fees of $1.7 billion are the second-highest ever at the bank.

JPMorgan Chase posted net income of 54 cents a share, compared with $4.23 billion, or $1.20 a share, in the same quarter last year. Analysts, on average, had expected earnings of 44 cents a share, according to Reuters Estimates.

The company's shares rose $3.98 to $39.92.

JPMorgan paid out 57 percent of its investment banking revenue as compensation, which is a relatively high level — banks typically aim for a compensation ratio closer to 50 percent.

Dimon said the bank's compensation ratio is likely to normalise, but jokingly added, "We don't want our people getting depressed." The acquisition of Bear Stearns, completed in the second quarter, contributed $540 million of losses and charges.

At Wednesday's close, JPMorgan's shares were down 15 percent this year, compared with a 35 percent decline in the KBW Bank Index. But since Tuesday's close, the bank's shares have risen more than 25 percent.

In response to the results, the cost to insure JPMorgan debt against a default with credit default swaps fell five basis points to 115 basis points, or $115,000 per year to insure $10 million of debt for five years, according to Phoenix Partners Group.

JPMorgan's Tier 1 capital ratio, a measure of capital strength, rose to 9.1 percent from 8.4 percent in the same quarter last year, though it would have been 8.1 percent without regulatory relief stemming from the Bear Stearns takeover, which was assisted by federal regulators.