UPDATE 1-US commercial paper market resumes expansion - Fed

(Updates with analyst comments, details, byline)

By John Parry and Walden Siew

NEW YORK Nov 19 (Reuters) - The U.S. commercial paper market grew last week, resuming a three-month period of expansion after two weeks of contraction, Federal Reserve data showed on Thursday.

The reemergence of that trend could be a positive sign for the still fragile economic recovery, analysts said.

"We saw commercial paper and business loans collapse and now at least with commercial paper we are generally seeing some stabilization," said Ray Stone, economist with Stone & McCarthy Research Associates, in Princeton, New Jersey.

"This is indicative of a moderation in the pace of inventory liquidation or perhaps an increase in inventories," Stone said."Either is good news for the economy."

However, the market continues to signal that the economic recovery that is underway remains vulnerable to setbacks, analysts added.

For the week ended Nov. 18, the size of the U.S. commercial paper market, a vital source of short-term funding for companies' daily operations, rose by $28.5 billion to $1.267 trillion outstanding, from $1.239 trillion last week.

The overall U.S. commercial paper market size is still well below its peak of $2.2 trillion outstanding in August 2007 when the credit crisis broke out.

Last week, non-seasonally adjusted data also shows a big expansion, of some $26 billion, confirming the market grew robustly, said Stone. That contrasts with recent weeks, when there have been big discrepancies between seasonally and non-seasonally adjusted data which have tended to exaggerate both contractions and expansions in headline commercial paper numbers, Stone said.

Companies issue commercial paper to restock shelves and pay salaries. As U.S. gross domestic product expanded in the third quarter, ending the long-running recession, the size of the commercial paper market grew as companies invested to meet a bounce in demand for their products.

However in the latest week, U.S. asset-backed commercial paper fell to $496.3 billion outstanding from $510.3 billion the previous week.

"What you'd want to see is an upward trend, especially in nonfinancial commercial paper. You want to see companies access the commercial paper market to support their working capital needs," said David Coard, head of fixed-income sales and trading at The Williams Capital Group in New York.

"I don't see it yet. I don't think you can infer anything about the economy except that it continues to be soft," Coard added.

Unsecured financial issuance rebounded, partially recovering from the previous two weeks steep declines. This category rose by by $40.6 billion after falling by $64.7 billion the previous week. (Editing by Theodore d'Afflisio)