UPDATE 3-Cerberus to suspend withdrawals from fund-source

(Adds Blackstone news)

By Jui Chakravorty Das

NEW YORK, Dec 23 (Reuters) - Cerberus Capital Management CBS.UL plans to pay 20 percent of year-end withdrawals in cash and suspend the remaining withdrawals for investors in its Cerberus Partners fund, a source briefed on the matter said on Tuesday.

Cerberus plans to suspend year-end withdrawals for up to one year, founder Stephen Feinberg said in a letter to the investors of the fund.

"When we wrote to you at the end of September we thought the trading levels for debt were ridiculously low and there was a great buying opportunity ... we were wrong," Feinberg wrote in the letter, according to the source.

"We believe it is necessary to suspend withdrawals in part so as to to unduly increase the illiquidity of the fund for remaining investors and to permit the fund to take advantage of the buying opportunities currently available in this depressed market on a limited basis," he wrote.

A Cerberus spokesman said the company does not comment on private communications with investors.

Cerberus Partners, a fund with $3 billion to $4 billion under management, was down 15.8 percent as of Nov. 30, with the bulk of the losses occurring in October and November, the letter said.

Cerberus Capital has about $27 billion in assets under management.

The developments come in a tough year for private equity firms and their investors. Private equity deal volume sank to a five-year low in 2008, and 2009 is unlikely to get any easier.

Cerberus also owns an 80-percent stake in struggling automaker Chrysler.

President George W. Bush last Friday offered General Motors Corp GM.N and Chrysler $17.4 billion in government loans to help them survive but demanded they prove by March 31 that they can become viable companies.

Cerberus last week said it would use the first $2 billion of proceeds from Chrysler's financing arm to backstop the government loan allocated to the car-making unit.

Cerberus said it did not have the liquidity to fund the loans requested by Chrysler and also said its investment in the automaker, initially 7.5 percent of its assets under management, was the single largest it had ever made.

BUYOUT TROUBLE

Buyout deals were just 7 percent of total merger and acquisition volume this year, the lowest level since 2001.