NEW YORK (Reuters) - Ailing mortgage finance company Freddie Mac easily sold $2 billion of debt on Monday, reassuring investors that it and rival Fannie Mae can fund operations without a government takeover.

Fannie Mae (FNM.N) shares rose 4 percent, and Freddie Mac (FRE.N) stock gained more than 11 percent in late morning trading in New York, even as broader markets fell.

An analyst said the companies, which own or guarantee nearly half of the mortgages in the United States, were unlikely to be nationalized, which also soothed market jitters.

Investors have been dumping their stock and have pushed the shares down more than 90 since March on fears the housing slump will leave the two insolvent without emergency support from the government.

Freddie Mac on Monday sold $1 billion each in three- and six-month bills, with a measure of bids stronger than its sale earlier this month. Freddie Mac and Fannie Mae must routinely issue debt to refinance maturing issues that fund their combined $1.5 trillion in mortgage investments.

"Agencies continue to fund themselves," Andrew Brenner, co-head of structured products and emerging markets at MF Global in New York, said in an e-mail.

The companies' ability to sell debt relatively cheaply is crucial not only for their existence but because they are the only large providers of money for the depressed housing market as banks and Wall Street investment firms have been sidelined by the credit crunch.

Selling debt under conditions of increased uncertainty over their financial health is seen a statement of the stability of the two government-sponsored enterprises, or GSEs.

Investors have feared that as mortgage defaults pile up and erode the two companies' capital, the U.S. Treasury would intervene, supporting their access to credit markets but leaving shareholders with nothing.

Citigroup analyst Bradley Ball challenged that premise.

"The recent GSE sell-off has been surprising, since the only catalyst was apparently a press report suggesting that federal officials are likely to recapitalize the GSEs soon," Ball wrote. Nationalization is unlikely, he said.

Citing an unnamed source, Barron's last week reported a government recapitalization of Fannie Mae and Freddie Mac was increasingly likely and that losses could go beyond common stock to preferred shares and subordinated debt.

Ball increased his "risk" rating on the two companies to "speculative" from "high," while keeping a "buy" on the shares. Ball slashed his target prices on Fannie Mae and Freddie Mac by more than half to $9 and $6, respectively.

In late morning trade, shares of Freddie Mac were 11 percent higher at $3.13 and Fannie Mae shares were 4 percent higher at $5.20

Ball wrote that companies' options include an equity investment by the Treasury, a loosening of capital surplus requirements by their regulator, a sale of mortgage bonds to free up capital, or nothing until market conditions improve.

Yield spread premiums on the corporate "federal agency" senior debt issued by Fannie Mae and Freddie Mac increased slightly after narrowing sharply last week. Investors believe a government bailout would make the debt more like U.S. Treasury securities, and remove the risk implied by the spread.

Fannie Mae on Monday announced it would tap the debt markets for $2 billion in three- and six-month bills.

(With reporting by Julie Haviv; Editing by Tom Hals)

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