(Adds quotes and material from full IG report)
WASHINGTON, Jan 8 (Reuters) - The New York Federal Reserve Bank sharply criticized an internal probe carried out by the Fed's inspector general on the handling of J.P. Morgan's "London Whale" case, according to a full version of the probe released on Thursday.
The New York Fed said the inspector general was wrong to criticize examiners for failing to prioritize exams of J.P. Morgan's chief investment office, according to the report.
The full report reveals an unusual and barbed clash between the Fed's New York branch and its internal auditor. The New York Fed - the central bank's eyes and ears on Wall Street - faced criticism on several fronts last year. The most damaging was the disclosure of secretly recorded tapes that portrayed New York Fed examiners as hesitant to demand answers and changes from Goldman Sachs officials.
The Fed's Office of the Inspector General released a 4-page summary report in October that criticized the New York Fed's handling of the huge JPMorgan credit derivative trading losses in Europe in 2012. The trading position grew so large that traders referred to it as the "London Whale." (To read that story, click on ) The losses were connected to the bank's chief investment office and ballooned to $6.2 billion by the end of that year.
The 77-page report released on Thursday marked the first time the New York Fed's criticism of the probe was made public. The initial report contained redactions and was released after freedom of information requests from the media.
The New York Fed says that the probe contained errors and unfairly criticized the way examiners decided which banks to scrutinize and in what order.
The New York branch said at a time during and after the 2007-2009 financial crisis, examiners were dealing with "difficult decisions" about numerous struggling institutions.
"It is not reasonable to substitute the (inspector general's) priority judgment, in hindsight, for the New York Fed's," read the response, which was signed by New York Fed General Counsel Thomas Baxter and Sarah Dahlgren, head of the financial institution supervision unit.
Among the findings in the watchdog report was that the New York Fed knew about the risks building in JPMorgan's chief investment office but failed to coordinate a proper response with the Office of the Comptroller of the Currency.
"The Report inaccurately reflects the frequency and nature of communications between the OCC and New York Fed," the Baxter and Dahlgren letter said.
Representatives at the New York Fed were not immediately available for comment. (Reporting by Emily Stephenson, Sarah Lynch, Michael Flaherty; Additional reporting by Jonathan Spicer in New York; Editing by Ken Wills)