Grocery store chain Great Atlantic & Pacific Tea Co filed for bankruptcy on Sunday, drained of cash by tough competition and a sluggish economic recovery.

Once the largest U.S. grocer, the owner of about 400 stores under brands such as A&P, Waldbaum's and Super Fresh filed for Chapter 11 bankruptcy in New York with more than $1 billion in assets and more than $1 billion in debt, according to court documents.

As of September 11, A&P had total debt of more than $3.2 billion, but it is unclear how much the company is currently carrying.

JP Morgan Chase & Co will provide $800 million in debtor-in-possession financing, the company said. The U.S. Bankruptcy Court for the Southern District of New York will hold a hearing on Monday to approve a portion of the facility.

The Montvale, New Jersey-based company said its stores will remain fully stocked and open with no interruption of business. It has struggled since it acquired Pathmark Stores in 2007 with a $1.4 billion financing package.

A&P had nearly $9 billion in sales in its fiscal year to February 2010, but it has been bleeding cash at a rate of nearly $5 million a week.

The company reported having less than $100 million in cash and short-term investments on hand in September and it faces debt maturities in June.

Its biggest stockholders are activist investor Ron Burkle and the German retail group Tengelmann. A&P said in a statement that its major shareholders support the action.

Burkle's Yucaipa investment firm has built up a large position in the company's debt recently, which could put it in a stronger position to control the bankruptcy, according to people familiar with the firm's activities.

WAREHOUSE WOES

A&P has been challenged by the economic downturn and competitors including warehouse clubs and discount retailers, Frederic Brace, the company's chief restructuring officer, said in court documents.

He said legacy costs for three areas had hurt the company: leases in locations where the company no longer operates, an unfavorable supply agreement with C&S Wholesale Grocers - which supplies 70 percent of its inventory - and a transportation contract with Grocery Haulers Inc., and high labor costs including its pension funding.

Another factor in deciding to file for bankruptcy, he said, was that A&P had a $13.4 million interest payment due on certain unsecured notes on December 15 and that failing to make the payment would have causes issues with its senior debt.

The company was founded in 1859 and grew to be the largest U.S. grocery chain by the 1930s, operating close to 16,000 stores at the time. American novelist John Updike wrote a well-known short story in 1961 called A&P, after the supermarket chain.

The recession and slow economic recovery have claimed several supermarket chains. They have been squeezed on prices by discounters that have expanded into the food business such as Wal-Mart Stores Inc , while well-heeled customers have been lured away by high-end offerings of competitors such as Whole Foods Market Inc .

Bruno's, Bi-Lo, Penn Traffic Co and Bashas' have all filed for bankruptcy over the past two years.

Trading in A&P's stock was halted on Friday in the early afternoon because of news pending. Before the halt, A&P's stock lost 67 percent in Friday's session to trade at 93 cents. It had traded as low as 87 cents during Friday's session. The stock peaked this year at $12.97 on January 7, according to Reuters data.

A&P is being advised on the restructuring by Lazard and law firm Kirkland & Ellis.

The case is in Re: The Great Atlantic & Pacific Tea Company Inc,, U.S. Bankruptcy Court, Southern District of New York, No. 10-24549.

(Additional reporting by Tom Hals; Editing by Jan Paschal, Diane Craft and Muralikumar Anantharaman)