April 17 (Reuters) - Discover Financial Services ( DFS )

on Wednesday reported a 68% drop in first-quarter profit, as the

lender set aside more in rainy-day funds to cover for potential

credit losses amid an uncertain economy.

U.S. banks have increased their provisions for losses from

bad loans as higher interest rates heighten the risk of default

on mortgages and credit card debt by consumers.

Discover's provision for credit losses jumped to $1.5

billion in the quarter ended March 31, from $1.1 billion in the

year-ago period.

During the reported quarter, Discover had agreed to be

acquired by U.S. consumer bank Capital One Financial ( COF ) in

a $35.3 billion all-stock deal, to create a global payments

giant.

The deal, which is expected to receive intense anti-trust

scrutiny, would form the sixth-largest U.S. bank by assets and a

U.S. credit card behemoth that would compete with rivals

JPMorgan Chase and Citigroup ( C/PN ).

Discover's net income fell to $308 million, or $1.10 per

share, in the January-to-March quarter, from $968 million, or

$3.55 per share, a year earlier.

Its quarterly net interest income, the difference between

what it makes on loans and pays out on deposits, however rose by

11.3%.