By Doris Frankel

CHICAGO, March 6 (Reuters) - The Chicago Board Options Exchange Volatility Index.VIX or VIX, Wall Street's favorite measure of investor fear, surged on Thursday as U.S. stocks sank on worries the economy is near recession.

The VIX, as it is commonly called, jumped 11.99 percent to close at 27.55, not far from its session highs of 27.90. The indicator is back up towards the upper end of its recent trading range and just below its Feb. 11 close of 27.60.

"With the ongoing problems in the mortgage industry and renewed concerns about liquidity in the financial markets, the options market is once again beginning to price in the prospect of higher volatility in the future," said independent options trader Frederic Ruffy.

The re-pricing of risk is reflected in a high VIX, which measures anticipated stock market volatility embedded in near-term Standard & Poor's 500 index .SPX option prices.

Worries about the financial stability of Thornburg Mortgage Inc (TMA.N: Quote, Profile, Research), a "jumbo" mortgage lender, along with a report showing that U.S. mortgage foreclosures reached a record high in late 2007 dealt the market a heavy blow.

"Credit concerns prompted investors to pay more for options to protect their portfolios," said Michael McCarty, options strategist at broker-dealer Meridian Equity Partners in New York. "We may see a 30 reading in the VIX if we get any kind of disappointment in the payroll number tomorrow."

Economists expect the report due on Friday to show non-farm payrolls rose by 25,000 in February, recovering from a drop of 17,000 in January.

"A loss of jobs would represent back-to-back declines and add to talk of recession, fueling more pessimism Friday morning," Ruffy said. "An in-line or slightly better-than-expected report should get a much more favorable reaction in the equity market."