UPDATE 2-Dresdner Kleinwort drops primary dealer status

(Updates with comment from Dresdner Kleinwort)

By Kristina Cooke

NEW YORK, June 26 (Reuters) - Dresdner Kleinwort Securities has withdrawn its name from the list of primary dealers of U.S. Treasury securities, the New York Federal Reserve said on Friday, as new parent Commerzbank scales back its U.S. operations.

The change, effective after the close of business on Friday, brings the number of dealers back down to 16 after Jefferies & Co (JEF.N) was added last week. Sixteen dealers is the smallest number in the network's 49-year history at a time huge government debt issuance is looming.

Primary dealers do business directly with the Fed and are required to bid at Treasury auctions. The Fed also regularly consults with them as it gathers market intelligence.

Kleinwort Benson Government Securities first became a primary dealer in 1980. It dropped from the Fed's list in 1989, but became a dealer again in 1997 after merging with Dresdner.

Commerzbank AG [CBKG.DE] took over Dresdner Bank earlier this year and has moved quickly to scale back its loss-making investment-banking unit and is focusing on its European operations.

"Retaining our US primary dealership does not fit in with the strategy of the new Commerzbank, which is to be a leading player and provider of liquidity in the European bond market going forward," said Marypat Davis, a spokeswoman for Dresdner Kleinwort in New York in an email. She added that a sales force would be kept in the United States to support that strategy.

Dresdner Kleinwort stopped producing U.S. economic research out of New York earlier this year.

The Fed has lost five dealers since the beginning of the global financial crisis. The others are Countrywide, which is now owned by Bank of America Corp (BAC.N); Lehman Brothers (LEHMQ.PK); Merrill Lynch, also owned by BofA; and Bear Stearns. The number of dealers peaked at 46 in the late 1980s.

The shrinking numbers come as the U.S. central bank buys longer-term government debt for the first time since the 1960s and as a wave of Treasury debt issuance, intended to finance economic rescue programs, hits the market.

In a February report, the Treasury Borrowing Advisory Committee said a larger primary dealer community would help to "reduce the possibility of an undersubscribed auction."

Futures and options broker MF Global Ltd (MF.N) and Japanese bank Nomura Holdings Inc (8604.T) confirmed earlier this year that they were in talks with the Fed about becoming primary dealers, but have given no updates since then. (Reporting by Kristina Cooke; additional reporting by Elinor Comlay; editing by Jan Paschal and Jeffrey Benkoe)