Updated from 7:29 p.m. EDT

The telecom meltdown entered a molten stage Sunday as

WorldCom

(WCOME)

filed for Chapter 11 protection in the biggest-ever U.S. bankruptcy filing.

The Clinton, Miss., telco filed late Sunday with the U.S. Bankruptcy Court for protection from its creditors, listing $104 billion in assets. The filing will help WorldCom secure financing, easing a cash crunch that staggered the company this month after anxious vendors began demanding immediate payment. WorldCom will continue operating its phone and business data services units as it reorganizes under bankruptcy law protection.

In a release issued late Sunday, WorldCom also announced that it obtained an agreement to arrange up to $2 billion in debtor-in-possession, or DIP, financing. It already has secured a commitment of $750 million of this amount from

Citibank

,

J.P. Morgan Chase

and

General Electric Capital

.

The move by the nation's No. 2 long-distance phone service provider had appeared all but inevitable ever since WorldCom said at the end of June that it had tampered with its books, cutting expenses by $3.9 billion. The disclosure led the

Securities and Exchange Commission

to file civil fraud charges against WorldCom. The company was already the subject of a number of probes of its accounting and business practices, including a 24-point inquiry launched by the SEC in March.

WorldCom also announced Sunday the election of two new board members: Nicholas deB. Katzenbach and Dennis R. Beresford. Katzenbach, a private attorney, served as U.S. attorney general, undersecretary of state and as senior vice president and general counsel of

IBM

until 1986. Beresford, an accounting professor at the University of Georgia, was the chairman of the Financial Accounting Standards Board from 1987 to 1997. Both were also appointed to the WorldCom board's special investigative committee to review the company's accounting practices and preparation of financial statements, according to the release.

Gloomy

WorldCom's bankruptcy filing will only deepen the gloom hanging over the stock market in general and the telecom sector in particular. Investors have spent most of 2002 fleeing the cash-strapped telecom business, creating financing headaches at debt-burdened operators such as WorldCom and

Qwest

(Q)

. WorldCom and others have sought to sell assets to raise cash and focus on core businesses, but buyers have been scarce as asset values fall across the industry. Now the prospect of further bankruptcies haunts investors who have already seen billions of dollars wiped out in the freefall of these onetime highfliers.

Ghoulish as it may sound, some observers have long advocated that the sooner all the superfluous telcos collapse and the market contracts, the sooner the industry can return to health.

Chapter 11 might just be the medicine WorldCom needs to survive, says Marty Hyman, an independent industry consultant and former partner with Booz Allen & Hamilton. Hyman gives WorldCom six months before it rises up from bankruptcy.

"It may emerge in two big lumps or singly, but it has an enormous constituency of customers, employees, regulators and suppliers that want to see it through to the other side," says Hyman, who has no consulting ties to WorldCom.

In terms of assets and name recognition, WorldCom dwarfs the biggest previous bankruptcy case, filed by energy trader Enron on Dec. 2, 2001. WorldCom's stock, which has lost 99% of its value this year and which last traded for 7 cents Friday, will become worthless as the company moves to reduce its $32 billion debt load and emerge as a viable business. The company was once valued at as much as $150 billion at the height of the telecom bubble.

Glut

WorldCom has been seen as holding among the most valuable assets in telecom: its big Internet backbone business as well as its shrinking but cash-generating MCI consumer long-distance service. But the economics of the telecom business have been deteriorating rapidly in recent years, as the easy money of the late 1990s Internet building boom created a glut of capacity that sharply eroded pricing power at all the big network operators. Meanwhile, the companies had embarked on debt-fueled expansions that now threaten their very existence.

WorldCom's rise and fall typifies the meltdown of the highly leveraged telecommunications sector over the last few years. Former CEO Bernie Ebbers assembled the company via some 70 acquisitions over the course of the growth-obsessed 1990s, and the stock acquired a huge following as revenue and earnings followed an ever-accelerating path. But along the way, WorldCom amassed billions of dollars in debt, weighing down its sagging cash flow with massive debt-service obligations.

The promises made to investors by the telcos and their backers, such as longtime WorldCom bull Jack Grubman, have come under increasing scrutiny since WorldCom's accounting disclosures. Earlier this month Congress began hearings into the WorldCom case, forcing current execs such as Sidgmore and former honchos such as Ebbers to face the music. With the market continuing to plunge and telecom companies getting sicker, the lava's only going to get hotter.