UPDATE 1-U.S. commercial paper market shrinks 4th week-Fed

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NEW YORK, Oct 9 (Reuters) - The U.S. commercial paper market contracted for a fourth consecutive week as many companies struggled to raise funds during the global financial crisis, according to Federal Reserve data released on Thursday.

The size of the U.S. commercial paper (CP) market, a crucial source for many companies in funding their day-to-day operations, fell $56.4 billion to $1.551 trillion in the week ended Wednesday from $1.607 trillion the previous week, the Fed said.

That brings the cumulative shrinkage to $264 billion over a four-week span, including the previous week's $94.9 billion plunge.

Analysts say that the commercial paper market, along with most other conduits of short-term borrowing for banks and companies, has effectively seized up in recent weeks.

Banks' distrust of lending to each other has pretty much stopped up interbank lending markets, with many hoarding cash for fear that some short-term loans might not get repaid. A similar dynamic is roiling the commercial paper market, analysts say.

Earlier this week, the government announced measures to bolster the struggling CP market, which took a fresh hit last month becauase of an upheaval in the money market mutual funds, a major class of CP buyers.

Most money market funds stopped buying commercial paper or sold them to brace for heavy withdrawal from investors. They were rattled after one of the biggest and oldest money funds reported its value fell below $1 per share, or "broke the buck", which is not supposed to happen with this type of investment.

The Federal Reserve said earlier this week that it has created a facility to buy top-rated commercial paper, but this Commercial Paper Funding Facility is not yet in operation.

Until the CPFF is up and running, CP buyers will likely stay on the sidelines, leading to further decline in CP outstanding, analysts say.

Asset-backed commercial paper, which was once the dominant CP class when it helped finance the U.S. housing boom, fell $17.5 billion in the latest week to $707.1 billion.

Meanwhile, the outstanding amount of unsecured CP issued by banks and financial companies fell by $42.4 to $641.0 billion, the Fed said. (Reporting by Richard Leong and Chris Reese, Editing by Chizu Nomiyama)