UPDATE 1-US overnight CP rates fall, market still stressed

(Adds details, background)

By Richard Leong

NEW YORK, Oct 10 (Reuters) - The interest rates on U.S. overnight commercial paper fell on Thursday, suggesting the start of a thaw after global government efforts to resuscitate an ailing credit market, Federal Reserve data released on Friday showed.

Improvement in the $1.55 trillion commercial paper (CP) sector is considered vital in a turnaround in the current credit crisis that began more than a year ago, analysts and

Many U.S. companies issue commercial paper to raise money for daily operations such as financing inventories and making payrolls. This critical funding source nearly dried up when many money market mutual funds, a major class of CP buyers, stopped buying this type of short-term corporate IOU's.

Earlier this week, the Fed introduced a new program to bolster this struggling sector, The Commercial Paper Funding Facility. When it is up and running it will buy high-quality CP. The CPFF followed a plan announced last month to aid banks to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market funds.

"When it comes, it will be a significant positive for the commercial paper market," said David Albrycht, portfolio manager at Goodwin Capital Advisers and oversees the Virtus Multi-Sector Short Term Bond Fund in Hartford, Connecticut.

Until that happens, longer commercial paper rates will be stuck at elevated levels or even scale higher, analysts said.

"Things are still stressed. There is no question," said James Caron, head of global rates research at Morgan Stanley in New York.

OVERNIGHT CP RATES

Interest rates on overnight CP issued by AA-rated, or mid-investment grade, financial companies averaged 1.71 percent on Thursday, down from 2.59 percent on Wednesday, the Fed said on Friday.

The average rate on overnight CP sold by AA-rated nonfinancial companies fell to 1.52 percent from 2.27 percent on Wednesday.

The overnight rate on asset-backed commercial paper averaged 3.97 percent, down from 5.07 percent on Wednesday.

While overnight rates showed sizable drops on Thursday, longer CP rates were mixed.

For example, the average rate on 30-day AA-rated financial CP jumped to 4.01 percent from 2.75 percent on Wednesday, according to Fed data.

The average rate on 30-year AA-rated nonfinancial CP fell to 1.65 percent from 1.85 percent on Wednesday.