UPDATE 1-US Treasury steps in to backstop money market fund

(Adds details from Treasury, mutual fund firm statement)

By David Lawder

WASHINGTON, Nov 20 (Reuters) - The U.S. Treasury agreed to bail out a money market mutual fund on Thursday, buying up to $5.6 billion in securities from The Reserve Fund's U.S. Government Fund under a new federal guarantee program.

The "extraordinary" action is being taken to aid the orderly liquidation of the fund, the Treasury said, and a spokeswoman added that the department does not expect to need to take the same actions for other money market funds.

The action was taken after redemption requests swamped the U.S. Government Fund after a sister Reserve Fund vehicle "broke the buck" in September when its net asset value fell below $1 per share. That episode prompted the Treasury to launch a guarantee program to prevent a massive outflow from money market funds.

The U.S. Government Fund, which invests in short-term debt issued by Fannie Mae (FNM.N), Freddie Mac (FRE.N) and other government enterprises, asked the Securities and Exchange Commission to allow it to temporarily halt redemptions until it could liquidate assets.

This has proven difficult amid financial turmoil. Under the Treasury plan, the fund has 45 days to try to sell assets at or above amortized costs. After that, on about January 3, 2009, the Treasury will step in as a buyer of last resort.

It will purchase assets at amortized cost to ensure that each shareholder receives $1 for each share they own.

The money will come from the $50 billion Exchange Stabilization Fund, which the Treasury tapped in September to backstop its guarantee program.

The U.S. Government Fund had around $10 billion in assets in mid-September, and The Reserve Fund said it was hit with $6 billion in redemption requests in one week.

The company said the fund now has about $6.3 billion in assets, including $231 million in cash. A U.S. Treasury spokeswoman said this was expected to fall to around $5.6 billion by the time the Treasury would buy its assets.

"Because of this agreement the Government Fund will be able to return all of the fund's money to investors early next year," Reserve Management Co Inc President Bruce Bent said in a statement. (Reporting by David Lawder, Editing by Andrea Ricci)