UPDATE 2-U.S. Treasury launches first toxic asset funds

* Two funds raise $1.13 bln in capital to buy toxic assets

* Treasury to match capital with equity, debt financing

* Seven other funds to complete initial rounds in October (Adds details on the program)

By Karey Wutkowski and Jennifer Ablan

WASHINGTON/NEW YORK, Sept 30 (Reuters) - The U.S. Treasury got off to a modest start with its plan to help cleanse banks of toxic assets when it announced on Wednesday that two funds to buy mortgage securities had raised $1.13 billion in private capital.

Invesco Ltd and Trust Company of the West, or TCW, are the first of the so-called Public-Private Investment Funds to raise the necessary capital to launch the program.

The Treasury said on Wednesday it expects seven more funds will complete initial closings by the end of October.

The Public-Private Investment Program, or PPIP, has been dramatically scaled back as banks have proven that they can raise capital in the private markets without first unloading troubled assets, many of which are tied to bad mortgages.

When the plan was announced in March, the government hoped the funds could take up to $1 trillion of toxic assets off bank balance sheets but that target is now $40 billion, comprising private and public investments plus debt financing.

"I am pleased with the progress we have made in launching PPIP," Treasury Secretary Timothy Geithner said in a statement. "This program allows Treasury to partner with leading investment management firms to increase the flow of private capital into the market for legacy securities and give taxpayers a chance to share in the profits."

The Treasury said the two funds' $1.13 billion of private-sector capital commitments will be matched by the government.

Jeffrey Gundlach, chief investment officer at TCW, declined to comment while calls to Invesco were not returned.

Treasury will also provide debt financing for up to 100 percent of the total capital commitments of each fund, representing about $4.52 billion of total equity and debt capital commitments for the first two funds.

For more information on the mechanics of the program, please see [nN08415665].

The launch of the program comes nearly a year after the U.S. Congress authorized a $700 billion fund to cleanse banks' balance sheets of toxic assets.

Officials shifted away from that idea and switched its focus to directly injecting capital into the banks before officially reviving in March the idea of buying toxic assets through public-private funds.

Invesco raised the minimum-required initial amount of $500 million while TCW raised the remainder of the $1.13 billion, according to a source familiar with the matter who asked not to be named.

The rest of the funds have until Oct. 8 to raise their required initial capital amounts.

In July, the Treasury named nine fund managers to run the partnerships for securities purchases. A parallel program run by the Federal Deposit Insurance Corp to auction whole loans to investors is still in a pilot stage.

The seven other managers chosen by the U.S. Treasury to launch fund-raising efforts were: Alliance Bernstein LP; Angelo Gordon & Co LP with GE Capital Real Estate; BlackRock Inc (BLK, US); Marathon Asset Management LP; Oaktree Capital Management LP; RLJ Western Asset Management LP and Wellington Management Company LLP.

Treasury said on Wednesday that following the funds' initial closings, they will have the opportunity for two more closings over the next six months.

The funds will have an opportunity to receive up to $30 billion in total Treasury equity and debt investment, bringing the total funding firepower of the program to $40 billion.

Treasury said that financial market conditions and the prices of so-called "legacy" securities have improved in recent months, enabling the government to scale back PPIP.

But it said it remains prepared to expand the amount of resources committed to the program if conditions deteriorate.