Fed balance sheet contracts in latest week

NEW YORK (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week with reduced holdings of agency and mortgage-backed securities despite the central bank's increased bond purchases, Fed data released on Thursday showed.

The Fed's balance sheet - a broad gauge of its lending to the financial system - stood at $2.787 trillion on September 26, down from $2.804 trillion on September 19.

The Fed's holdings of Treasuries totaled $1.648 trillion as of Wednesday versus $1.646 trillion the previous week.

The Fed's ownership of mortgage bonds guaranteed by Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB) and the Government National Mortgage Association (Ginnie Mae) totaled $834.98 billion, down from $850.14 billion the previous week.

The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $83.41 billion, down from $87.10 billion the previous week.

On September 14, the Fed began its third round of large-scale bond purchases, commonly referred as QE3, which involved an additional $40 billion of MBS purchases a month.

The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $43 million a day during the week compared with a $13 million a day average rate the prior week. (Reporting by Richard Leong; Editing by Chizu Nomiyama)