UPDATE 1-Fed's Bear portfolio shrinks more than $1 bln

NEW YORK, July 3 (Reuters) - The Federal Reserve's portfolio of Bear Stearns assets has lost more than $1 billion of its original value, a sign that credit market conditions have worsened in recent months.

The central bank said on Thursday the portfolio of tarnished securities is currently worth $28.89 billion, compared to the $30 billion originally used in JPMorgan Chase & Co's (JPM.N: Quote, Profile, Research) buyout of Bear Stearns.

Analysts caution that these numbers must be read with a grain of salt, since the Fed admitted the securities were being valued as if "the transaction were to be conducted in an orderly market on the measurement date."

Since markets have been far from orderly, investors say they still feel very much in the dark regarding the true worth of the assets, many of which are presumed to be linked to the crisis-ridden real estate sector.

"One problem for financial markets, however, is there is no detail on the value of assets, how to value specific assets and how to value risk," said Tony Crescenzi, head of bond market strategy at Miller Tabak.

Still, the drop in its estimated value suggested banks, whose shares have already been battered by the nearly year-long credit crisis, may take a further hit on their bottom line.

"The Fed is saying we are putting this under lock and key," said Thomas Higgins, chief economist at Payden & Rygel in Los Angeles. "If they sell them now, they would have to sell them at distressed levels. Would that be the true market value?"

The Fed's decision to put up taxpayer money into a major bank bailout has been controversial. Many policy-makers, including sitting officials on the Fed's interest rate committee, voiced reservations about this expansion of the central bank's role.

Perhaps most famously, former Fed chief Paul Volcker said the Fed had stepped to the edge of its mandate in conducting the rescue plan.