It’s crunch time.

A mortgage bond fund taken public in Europe by private equity powerhouse Carlyle Group is on the brink of collapse after talks with lenders fell apart.

The information stirred anew fears on world markets that the credit crisis was widening even as the Federal Reserve and other central banks take steps to try to stabilize credit.

But after tumbling in morning trading, U.S. stocks came back after Standard & Poor's said in a report that "the end of write-downs is now in sight for large financial institutions."

The ratings agency increased its estimate of total write-downs on credit derivatives tied to subprime assets to $285 billion from $265 billion.

However, "the positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime asset-backed securities," Scott Bugie, S&P credit analyst, said in a statement.

At 3:15 p.m., the Dow Jones industrial average is up about 60 points. Earlier, the Dow and other market measures were down 2 percent on credit worries. 

In addition to the Carlyle news, these concerns have been compounded by continued concerns over Bear Stearns and Countrywide Financial. And the Times of London says that a number of American hedge funds are weighing shutting down or freezing withdrawals as a result of the credit crunch.

The bond fund that sparked today's market turmoil, Carlyle Capital Corp., said that it "has become apparent to the company that the basis on which lenders are willing to provide financing against the company’s collateral has changed so substantially that a successful refinancing is not possible."

As a result, lenders are expected to take possession of the fund's remaining $16.6 billion in assets. A decline in the value of its mortgage-backed securities would have resulted in margin calls of nearly $98 million in addition to the $400 million in margin calls made earlier, the fund said.

The response of the banks would appear to be contrary to the spirit of the effort the Federal Reserve to encourage greater confidence in lending and keep the banks from panicked repossessions. On Tuesday, the Fed said it would allow Wall Street banks to swap as much as $200 billion of mortgage-backed securities and other debt for Treasury securities.

Robert Peston of the BBC argues that the Fed action has had the opposite effect, in fact, encouraging banks to seize assets from borrowers like Carlyle. Peston says:

Because the Fed’s new emergency lending facility allows the banks to swap mortgage-backed debt for Treasury bills in a way that Carlyle could not do, it would be rational for the banks to take Carlyle’s assets and exchange them for top-quality, liquid U.S. government bonds, rather than leave loans in place to a business, Carlyle, whose assets remained highly illiquid. If that’s the case, there will be some very scared people in hedge fund land today.

A forced liquidation of the Carlyle fund would be a huge blow to the reputation of the Carlyle Group, one of the biggest and most respected private equity firms in the world. The fund was listed on the Amsterdam exchange by Carlyle last summer, and Carlyle Group partners, including co-founder David Rubenstein, own 15 percent of Carlyle Capital.

Carlyle Group said in a statement that Carlyle Capital "is a separate legal and business entity, and we believe it will not have a measurable impact on any of our other funds, investments, and portfolio companies."