UPDATE 1-U.S. banks borrow more from Fed in latest week

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NEW YORK Feb 5 (Reuters) - U.S. banks' direct borrowing from the Federal Reserve at the discount window rose in the latest week, bucking the trend of recent declines, as banks remained heavily reliant on the lender of last resort in the biggest credit crisis in decades, Fed data showed on Thursday.

Banks' overall borrowings averaged $153.69 billion per day in the week ended Feb. 4, up from an average $150.01 billion per day the week before.

But the Federal Reserve's balance sheet -- a broad gauge of the central bank's lending to the financial system -- slipped to $1.834 trillion on Feb 4, from $1.911 trillion on Jan. 28.

Banks' primary credit discount window borrowings averaged $67.43 billion per day in the latest week, up from $64.99 billion the previous week.

Net portfolio holdings of the Fed's Commercial Paper Funding Facility, which is buying three-month top-rated CP to free up this key area of short term lending, were $258.66 billion as of Feb 4, versus $248.09 billion on Jan. 28.

As recently as Jan. 21, the Fed's CPFF holdings were as high as $350.5 billion.

The general trend is toward less Fed support for the commercial paper market as private sector demand for this paper from money market funds and other investors creeps slowly back, some analysts said.

"Sooner rather than later people will start pushing away from the government as the markets thaw out in commercial paper," said Andrew Brenner, analyst at MF Global Inc. in New York.

Primary dealer and other broker dealer borrowings slipped to $27.20 billion as of Feb. 4, from $32.20 billion on Jan. 28.

Loans to insurer AIG were $38.64 billion as of Feb. 4, versus $38.34 billion as of Jan. 28.

The Fed's holdings of agency mortgage-backed securities were unchanged at $7.38 billion on Feb. 4 from $7.38 billion on Jan. 28. (Reporting by John Parry; Editing by Leslie Adler)