In the past decade, states, cities, hospitals and others that sell debt in the $2.6 trillion muni bond market have increasingly used swaps to lower rates by selling floating-rate debt and locking in that cost with a fixed-rate swap.

"I think if municipal issuers never did another swap it would probably raise the cost of financing in the long term," said Evan Rourke, an M.D. Sass muni strategist in New York.

Alabama's Jefferson County, which has threatened to file for bankruptcy in a battle with banks, including JP Morgan, is one issuer that probably will not venture back into swaps any time soon. Swaps aggravated the county's financial woes, which were caused by $3.2 billion of soured sewer debt.

Travis Hulsey, Jefferson County's acting finance director, said other issuers also might be disinclined to use swaps.

"J.P. Morgan's dropping out of offering derivatives possibly signals the curtailing of derivatives as instruments for municipalities," he said. "It would be some time before Jefferson County considered instruments of this nature again."

JP Morgan is closing a unit that offered muni interest rate swaps amid probes by the U.S. Department of Justice and the Securities and Exchange Commission into the sale of some derivatives and investment contracts.

A bank spokeswoman declined comment on the investigations.

But other banks that offer swaps as part of their muni underwriting business are unlikely to follow JP Morgan out the door as this can be quite profitable, muni analysts said.

JP Morgan's competitors also could win business from it because municipal issuers often demand swaps.

"I think that's been the cornerstone of profitability and the underlying reason to even be in public finance for most of the firms," said one of the analysts, who requested anonymity.

Referring to JP Morgan, he added: "So I think they are going to be going into battle without any weapons if they don't have a derivative desk to offer an issuer."

In the past, banks that could not offer swaps either lost out muni underwriting deals or had to hire competitors to provide swaps, he said.

Other issuers took a more measured approach to the latest upheaval in the muni market, which since January has been grappling with the collapse of the $330 billion auction rate market, another victim of the global credit crunch.

Pennsylvania Treasurer Robin Wiessmann, a Democrat, said the fault lay not with derivatives but with how they were used.

Similarly, David Bryant, treasurer of the Chicago Public Schools, said: "I wouldn't throw out all swaps."

Chicago's school system has existing swaps, though not with J.P Morgan, and it will continue to look at swaps if they are economically compelling. "I would discuss the risks and benefits with my board," Bryant said.

JP Morgan said it will still offer swaps to some muni issuers: nonprofit health care entities, private educational and cultural organizations, and for-profit clients.

The decision to keep this line of business might reflect the often simpler and swifter financial decisions these issuers can make. City or county governments typically require multiple approvals, which dilutes the responsibility of individual officials, and reduces banks' leverage in disputes.

This is not the first time that complex financial deals have rattled muni issuers. City and county officials often have broad responsibilities, including pensions and healthcare, in addition to debt. So they can be at a disadvantage in dealing with Wall Streeters who specialize in bonds, the experts said.

After California's Orange County's 1994 bankruptcy, one of the largest-ever such filings, there were calls for federal and local bans on derivatives -- and some curbs were enacted. Interest-rate derivatives had cost the county $1.6 billion.

Asked about bans, the Pennsylvania treasurer said: "If I were to see that there were very serious, systemic risks with the use of derivatives as it relates to them as a product, then I would perhaps think about it." The legislature has only approved derivatives for some agencies and localities, not the Commonwealth itself, she noted.

(Reporting by Joan Gralla in New York, Karen Pierog in Chicago, Melinda Dickinson in Birmingham and Michael Connor in Miami)