UPDATE 1-Panic subsides in money-market funds

(Recasts with quotes, background, Primary Fund lawsuit and byline)

By Muralikumar Anantharaman

BOSTON, Sept 23 (Reuters) - The panic that swept the $3.4 trillion U.S. money-market funds industry last week appeared to be abating as investors stopped record withdrawals from the once-safe products after the government made plans to put up $50 billion to guarantee their safety.

"The panic and the outflows have been halted," Peter Crane, president and publisher at Westboro, Massachusetts-based research firm Crane Data LLC, told Reuters. "The immediate threat has passed."

Assets in money-market funds increased by $1.5 billion on Monday after falling $188.6 billion, or 6.1 percent, last week, Crane said on Tuesday. And iMoneyNet, another industry research firm, said money-market funds saw inflows of net $5.5 billion on Monday.

Money-market funds are used by companies and institutional and retail investors to park cash they don't need right away but want to access at short notice. These funds offer higher rates than bank deposits and are always expected to maintain par value of their shares at $1.

That changed last week as the collapse of investment bank Lehman Brothers Holdings Inc (LEHMQ.PK) caused the shares of one of the oldest and biggest money-market funds to drop below $1, known in the industry as 'breaking the buck'. It had been been 14 years since a fund had 'broken the buck'.

The $62 billion Primary Fund said a week ago its shares fell to $0.97, triggering an exodus of investors. It held $785 million of Lehman commercial paper and medium-term notes, which were revalued as "zero" after Lehman filed for bankruptcy.

The fund, whose chairman Bruce Bent is known as the "father" of the industry after creating the first money-market mutual fund in 1970 with a partner, said investors wanted to pull out $60 billion and halted redemptions.

'DIRECT INFUSION'

A lawsuit brought by Ameriprise Financial Services Inc (AMP.N) accusing the Primary Fund of tipping certain investors about its troubles has been expedited by a judge in a U.S. court. A fund spokeswoman declined to comment on the Ameriprise case and other lawsuits filed in another U.S. court.

Boston-based Putnam Investments, a unit of Canada's Great-West Lifeco Inc (GWO.TO), said on Thursday its head of investments, Kevin Cronin, had resigned for personal reasons. Putnam had shut a $12.3 billion money-market fund last week as investors rushed out.

Privately owned Fidelity Investments and Vanguard Group, as well as BlackRock Inc (BLK.N) and Federated Investors (FII.N) are among the biggest money-market fund companies.

Money-market funds are big buyers of commercial paper -- debt issued by corporates to fund their daily operations. With the fund industry disrupted, the commercial paper market was hit last week, causing concerns that the broader economy would be hurt.

The government responded, saying on Friday it would use $50 billion to back money-market mutual funds which 'broke the buck' and also ease their liquidity by lending more money directly to financial institutions so they could purchase certain assets from money-market funds.

And the U.S. Federal Reserve bought on Tuesday $2 billion in short-term debt from mortgage agencies in the open market to add liquidity to securities now shunned by money-market funds. It had already made an initial $8 billion purchase on Friday.

"They are taking agency discount notes out of the market so they can help keep money-market funds from breaking the buck," said Michael Franzese, head of government trading at Standard Chartered in New York. "The Fed operation is like a direct infusion," he said.

Crane of Crane Data said funds and investors were still awaiting the details of the government guarantee program and there would not be much movement in overall assets in the interim.

"But the important thing is they have stopped the bleeding and everyday that there aren't outflows allows money funds to recover and get stronger on their own," he added. (Additional reporting by Richard Leong and John Parry in New York; Editing by Bernard Orr)