UPDATE 1-Fed's balance sheet grows with Treasuries holdings

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NEW YORK Aug 13 (Reuters) - The U.S. Federal Reserve's balance sheet expanded in the latest week, thanks to a jump in Treasuries holdings, Fed data showed on Thursday.

The Fed's balance sheet liabilities -- a broad gauge of its lending to the financial system -- reached $2 trillion on Wednesday from $1.974 trillion a week earlier.

The U.S. central bank's holdings of U.S. government debt increased to $728.97 billion on Wednesday, up from $705.33 billion a week earlier.

On Wednesday, the Federal Open Market Committee, the Fed's policy-setting group, said after a two-day meeting it decided to move the expiration of its $300 billion Treasury purchase program to October from September.

The Fed's buying of U.S. government debt has been the pillar of its quantitative easing policy aimed at trimming long-term interest rates in an effort to end the worst U.S. downturn in 70 years.

The Fed -- the U.S. central bank -- has also pledged to buy $1.25 trillion in mortgage-backed securities to target mortgage rates and help heal the battered housing market.

As of Wednesday, the Fed held $542.89 billion in these bonds backed by pools of mortgages, flat from the level reported a week ago.

The large increase in the Fed's Treasuries holdings was partly offset by declines in direct loans to banks, commercial paper holdings and overseas lending of dollars.

The central bank's backstop for commercial paper created in reaction to the credit crunch last autumn fell to $58.05 billion on Wednesday from $61.16 billion a week ago.

The Fed's liquidity swap lines that make dollars available overseas via other central banks averaged $76.28 billion per day in the week ended Wednesday, below the daily rate of $77.39 billion last week.

The central bank's direct overnight lending to banks slowed to a daily rate of $105.98 billion from $107.84 billion in the previous week.

Overnight discount window loans to the most creditworthy U.S. banks averaged $33.93 billion a day in the latest week, down from the daily rate of $35.09 billion in prior week. (Reporting by Richard Leong; Editing by James Dalgleish)