UPDATE 1-US banks borrow less but still lean heavily on Fed

(Adds details, analysts' quotes)

NEW YORK, Jan 2 (Reuters) - U.S. banks' direct borrowing from the Federal Reserve slipped in the latest week but the financial system remained heavily dependent on the lender of last resort amid the biggest credit crisis in many decades, Fed data released on Friday showed.

Banks' overall borrowings averaged $187.77 billion per day in the week ended Dec. 31, down from an average $196.87 billion per day the previous week.

Banks' direct borrowing via the discount window may have eased because many were choosing to tap cheap cash from an array of auction programs the Fed is running to aid financial institutions, said Michael Feroli, U.S. economist with JPMorgan in New York.

"With all these programs to provide year-end funding, the Fed has provided so much liquidity that there was less demand for cash via the discount window," he said.

Liabilities on the Federal Reserve's balance sheet from its support lifelines to help the financial system weather the worst crisis since the 1930s rose to $2.249 trillion on Dec. 31 from $2.241 trillion on Dec. 24.

The data "paints the same picture: that the Fed is continuing to provide a 'gi-normous' amount of reserves to the system," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco. "That's their quantitative easing."

Net portfolio holdings of the Fed's Commercial Paper Funding Facility, which is buying three-month top-rated CP to free up this key area of short-term lending, were $334.10 billion as of Dec. 31 versus $331.69 billion on Dec. 24.

(Burton Frierson contributed to this report) (Reporting by John Parry; Editing by Dan Grebler)