Treasury may capitalize banks by end October: source

WASHINGTON (Reuters) - The Treasury Department plans to start directly injecting capital in U.S. banks as soon as the end of October in a program that would involve passive investments, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.

Under authority granted to it by last week's $700 billion market rescue legislation, Treasury plans to inject capital in exchange for common and preferred shares and does not intend to seek board seats in the voluntary program, the source told Reuters on Thursday.

Paulson said at a news conference on Wednesday that the financial bailout bill gives him wide authority to inject capital into the banking system and would not rule out having Treasury take an ownership position in banks if necessary.

Treasury's plan to inject capital would follow action by the British government on Wednesday in which it pledged billions of dollars to shore up banks' capital in exchange for preference shares.

(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)