UPDATE 1-Banks borrow record $420.2 bln per day from Fed

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NEW YORK Oct 9 (Reuters) - U.S. banks' direct borrowing from the Federal Reserve climbed to a record for the second straight week as they continued to rely on the lender of last resort amid the most severe financial crisis in a generation.

Banks' discount window borrowings averaged a huge $420.2 billion per day in the week ended Oct. 8, beating the previous record daily average of $367.8 billion they borrowed the previous week.

Primary credit borrowings averaged a $75.01 billion per day in the latest week, 70 percent higher than the $44.46 billion average in the previous week.

Primary dealers and other broker dealers credit borrowings were $122.94 billion as of Wednesday Oct 1, down from $146.57 billion on Oct 1.

Loans in the "other credit extensions" category, including loans to insurer AIG were $70.30 billion as of Oct. 1, versus $61.28 billion a week earlier.

The Fed's lending to U.S. depository institutions and bank holding companies, to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds via a new lending facility the Fed announced on Sept. 19, jumped in the latest week.

Lending via the ABCP money market mutual fund liquidity facility eased to $139.48 billion on Wednesday from $152.1 billion on Oct 1.

The Fed designed the loan facility to help money market funds meet heavy withdrawal from rattled investors after one of the biggest U.S. money market fund last month said its share fell below $1 or "broke the buck" -- which is not supposed to happen with this type of investment.

Earlier this week, the Fed introduced another program to aid the struggling CP market. The Commercial Paper Funding Facility when it is up and running will buy high-quality commercial paper.

Meanwhile, proceeds in the U.S. Treasury supplementary financing account were $459.25 billion on Wednesday, up more than 30 percent from $344.47 billion a week ago, the Fed said. (Reporting by Chris Reese and Richard Leong)