UPDATE 1-US commercial paper outstanding grows on week-Fed

(Adds strategist comment)

NEW YORK, July 3 (Reuters) - The U.S. commercial paper market grew by the largest amount in four months in the latest week, while the closely watched asset-backed sector also gained, Federal Reserve data showed on Thursday.

For the week ended July 2, the size of the U.S. commercial paper market, a vital source of short-term funding for daily operations at many companies, expanded by $27.1 billion to $1.780 trillion, from $1.753 trillion the previous week. That marked the biggest weekly increase in commercial paper outstanding since early March.

One strategist attributed part of the jump to a recent increase in retail sales, and related company needs for increased capital to meet demand. Retail sales, excluding automobiles, rose 1.2 percent in May -- the biggest jump in six months.

"We have recently seen an increase in retail sales, and companies use the commercial paper market to raise working capital to make products that they sell and take the proceeds and turn them back to commercial paper investors," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co in New York.

Asset-backed commercial paper outstanding rose $8.1 billion after falling $5.0 billion the previous week. U.S. asset-backed commercial paper outstanding rose to $756.5 billion in the latest week from $748.4 billion the previous week. (Reporting by Chris Reese; Editing by Andrea Ricci)