UPDATE 1-JP Morgan sees more dividend cuts at mid-sized US banks

(Adds analyst comment, background)

Nov 13 (Reuters) - The inability to earn at par with dividend levels, and regulatory pressure will force more U.S. mid-sized banks to further slash their dividend, J.P. Morgan Securities analyst Steven Alexopoulos said.

U.S. lawmakers had urged Treasury Secretary Henry Paulson on Wednesday to clarify that the government bailout funds should not be used to acquire healthy banks or pay out dividends.

Banks should not maintain a level of cash dividends inconsistent with the firm's capital position that could weaken the firm's financial health, or that could impair its ability to meet the needs of credit-worthy borrowers, regulators said.

Analyst Alexopoulos said Marshall & Ilsley Corp (MI.N), TCF Financial Corp (TCB.N), BB&T Corp (BBT.N), Synovus Financial Corp (SNV.N) and M&T Bank Corp (MTB.N) are most likely to be forced by regulators to cut their dividend, although each of them have said they do not need to take such a step.

The analyst sees least risk of a dividend cut at City National Bank (CYN.N), PrivateBancorp Inc (PVTB.O), People's United Financial Inc (PBCT.O) and Zions Bancorp (ZION.O).

U.S. banks like Colonial BancGroup Inc CNB.N, Columbia Bancorp (CBBO.O) and Cascade Financial Corp (CASB.O) have been slashing or suspending their dividend in the past months amid a difficult credit market and declining capital levels, as shareholder equity continues to fall.

So far the Treasury Department has injected $115 billion into the eight largest banks, such as Goldman Sachs (GS.N), in a bid to mend broken credit markets and restore health to the financial system. The government has earmarked a total of $250 billion for banks, including money for smaller, regional ones.

The $60 billion remaining under the U.S. government's Troubled Assets Relief program (TARP) is likely to be used in capital infusion, although asset purchases as originally planned cannot be ruled out, analyst Alexopoulos said.

The Bush administration on Wednesday largely abandoned its plan to buy up toxic mortgage assets and said it will focus its $700 billion financial bailout fund on making direct investments in financial institutions and shoring up consumer credit markets.

The U.S. Treasury Department initially promoted the financial rescue package approved by Congress last month as a vehicle to buy illiquid mortgage assets from banks and other institutions to spur fresh lending.

A weak economic environment through the year-end will put pressure on valuations of the banks, Alexopoulos said. "The economy is in a recession with the question now, in our view, being how deep and for how long."

People's United and PrivateBancorp are well-positioned to gain from a negative impact on their competitors amid an economic slowdown, the analyst said. (Reporting by Anurag Kotoky in Bangalore; Editing by Pratish Narayanan)