U.S. bailout panel: toxic assets may need more support

WASHINGTON, Aug 11 (Reuters) - The U.S. Treasury Department should consider expanding programs to cleanse troubled assets from bank balance sheets if current efforts fail to restart markets or if economic conditions worsen, a U.S. bailout watchdog panel said on Tuesday.

The Congressional Oversight Panel said in its latest monthly report that toxic loans and securities continue to pose a threat to the financial system, particularly for smaller banks that face mounting losses on commercial real estate loans.

These banks may need similar stress tests and capital support afforded to larger institutions, the panel added.

Despite improved financial market conditions, the panel said a "continuing uncertainty is whether the troubled assets that remain on bank balance sheets can again become the trigger for instability."

"Treasury must assure robust legacy securities and legacy loan programs or consider a different strategy to do whatever can be done to restart the market for those assets," the panel said. (Reporting by David Lawder; Editing by Kim Coghill)