The banks are the first major U.S. lenders to report results for the third quarter, a difficult period for banks that grew dire in late September as credit markets seized up.

"If you are not fearful, you're crazy," JPMorgan Chief Executive Jamie Dimon said on a conference call.

Though quarterly profit fell 84 percent at JPMorgan and 25 percent at Wells Fargo, investors were heartened that tighter credit and a souring economy didn't hurt more. Both banks added deposits as nervous customers fled weaker rivals.

"If you were a bull, the results confirm these companies will be survivors," said Richard Moroney, chief investment officer of Horizon Investment Services LLC in Hammond, Indiana. "They both had major deterioration in credit, and that's hardly a pretty picture, but results didn't seem that bad."

Both banks are making big bets on the economic outlook with acquisitions of major lenders felled by risky home loans. JPMorgan last month bought Washington Mutual Inc's (WAMUQ.PK) bank units for $1.9 billion, and Wells Fargo is buying Wachovia Corp (WB.N) in a takeover originally valued at $15.1 billion.

Despite being well capitalized, JPMorgan and Wells Fargo were among the initial nine lenders to get capital injections this week from U.S. Treasury Secretary Henry Paulson's $250 billion plan to restore confidence in the financial system.

In late-morning trading on the New York Stock Exchange, JPMorgan fell 44 cents to $40.27, while Wells Fargo rose $1.28 to $34.80. The KBW Bank Index (.BKX) was down 2.6 percent, and broader indexes tumbled after a government report on U.S. retail sales fanned fears the economy is in a recession.

JPMORGAN

Quarterly profit at New York-based JPMorgan fell to $527 million, or 11 cents per share, from $3.37 billion, or 97 cents, a year earlier.

Excluding items, the bank had a loss of 6 cents per share, compared with the average analyst forecast for a loss of 29 cents, Reuters Estimates said. Net revenue fell 9 percent to $14.74 billion, topping the average $14.62 billion forecast.

JPMorgan nearly tripled the amount it set aside for credit losses, to $6.66 billion.

It wrote off $3.6 billion for mortgage debt and leveraged loans in its investment bank, lost $642 million on Fannie Mae (FNM.N) and Freddie Mac (FRE.N) preferred stock, and took a $248 million charge to buy back auction-rate securities.

The acquisition of Washington Mutual, once the largest U.S. savings and loan, gave Dimon some 5,400 branches and fulfilled his longtime goal of expanding to the western United States.

With $2.25 trillion of assets, JPMorgan may have surpassed Citigroup Inc (C.N) to become the largest U.S. bank for now. Citigroup reports quarterly results on Thursday.

JPMorgan said, though, that quarterly mortgage and home equity losses could top $1.5 billion early next year.

The bank is absorbing an estimated $31 billion of loan losses from Washington Mutual, and Dimon said overall earnings might be reduced over the next few quarters. "We necessarily need to be prepared for a bad environment," he said.

WELLS FARGO

At San Francisco-based Wells Fargo, profit dropped to $1.64 billion, or 49 cents per share, from $2.17 billion, or 64 cents, a year earlier. Revenue rose 5 percent to $10.38 billion, while expenses fell 3 percent.

Analysts on average expected profit of 34 cents per share on revenue of $11.08 billion. Results included $646 million of charges related to Fannie Mae and Freddie Mac preferred stock and to Lehman Brothers Holdings Inc's (LEHMQ.PK) bankruptcy.

The bank's largest investor is Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N).

Wells Fargo set aside $2.5 billion for credit losses, and net charge-offs more than doubled to $2 billion. It expects home equity loan losses to be higher than normal until housing prices stabilize.

"The economy is weak and maybe is in a recession," Chief Financial Officer Howard Atkins said in an interview. "Having said that, the steps taken by the government will help over time, and we'll see what happens."

Wells Fargo was able to wrest Wachovia from the arms of Citigroup largely because it never dove deeply into the risky mortgages and exotic debt that strangled Wachovia, Washington Mutual and IndyMac Bancorp Inc (IDMC.PK).

The merger is expected to close this quarter and create the fourth-largest U.S. bank, with more than $1.4 trillion of assets and about 6,600 branches.

Separately, Paramus, New Jersey's Hudson City Bancorp Inc (HCBK.O) said third-quarter profit rose 64 percent to $121.9 million, or 25 cents per share, from $74.4 million, or 15 cents, a year earlier, as its home lending business thrived. Analysts expected profit of 24 cents per share.

Hudson City will become the nation's largest thrift following the expected sale of Sovereign Bancorp Inc (SOV.N) to Spain's Banco Santander SA (SAN.MC).

(Additional reporting by Joseph A. Giannone and Ellis Mnyandu; editing by John Wallace)