U.S. officials fear CIT situation has worsened: source

WASHINGTON (Reuters) - U.S. officials are still exploring providing government assistance to CIT Group, but are increasingly concerned that conditions at the lender have deteriorated too far, according to a source familiar with government talks.

The source said Treasury Department officials are concerned that CIT's liquidity crunch has worsened over the past few days and that government aid would not effectively put the lender on a path to recovery.

A resolution for the lender's liquidity problems is expected in the next 24 hours and could end in a bankruptcy filing, the source said, speaking anonymously because the situation is still fluid.

Trading in CIT shares was halted on Wednesday afternoon, further signaling some sort of announcement was imminent.

CIT, a lender to thousands of small businesses, has said it is in round-the-clock talks with regulators about how to improve liquidity after billions of dollars in losses have severely limited its ability to raise money.

The Treasury has discussed devising an aid package, including a temporary loan that would give CIT room to strengthen its balance sheet by raising additional capital through debt or equity, the source said.

Other options discussed have been access to the U.S. Federal Reserve's discount window and asset transfers.

Treasury has also been supportive of the Federal Deposit Insurance Corp granting CIT access to its government debt guarantee program, the source said. The FDIC has been reluctant to do so, however, because the program is designed for healthy institutions, and it believes CIT's participation involves too much risk.

Barney Frank, chairman of the House Financial Services Committee, said on Wednesday that he hoped the government could come up with a structured aid package for CIT.

"I've spoken with (Treasury) Secretary Geithner, and I understand they're working hard to try to come up with something responsible to try to prevent the failure," Frank told Reuters in an interview.

"If CIT doesn't get structured help, then it will have a very negative effect, I'm told, on small businesses around the country."

(Reporting by Karey Wutkowski and Rachelle Younglai; Editing by Tim Dobbyn)