UPDATE 2-Banks to set up $80 bln fund to limit credit crunch

(Adds details on SIVs)

By Dan Wilchins and Patrick Rucker

NEW YORK/WASHINGTON, Oct 14 (Reuters) - Major banks including Citigroup Inc are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets, in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said.

Representatives from the U.S. Treasury have organized conversations among top global banks, sources said, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.

A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the U.S. or Europe into recession.

The fund is the latest response to a global credit hangover after at least three years of easy credit that fueled massive mortgage lending in the United States and spurred record levels of leveraged buyouts.

"Banks made unwise business decisions, and now they're scrambling to save themselves," said Steve Persky, chief executive at Dalton Investments in Los Angeles, which has $1.2 billion under management.

Citigroup (C.N: Quote, Profile, Research, Stock Buzz), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) and Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) are involved in the discussions, according to people familiar with the situation. The three banks declined to comment.

The U.S. Treasury is involved in the discussions, but taxpayer money is not expected to be used.