Paulson hedge fund to raise bank rescue fund: source

NEW YORK (Reuters) - Paulson & Co, the hedge fund that raked in billions of dollars betting on the credit crisis, is looking to start a new fund aimed at recapitalizing ailing financial institutions, two sources familiar with the matter said on Wednesday.

The development would follow recent investments by sovereign wealth funds and private equity funds in the financial sector, where banks have taken billions of dollars in write-downs for failed mortgage-related investments in the last year.

Last year, Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) raised billions of dollars from sovereign wealth funds, while in April an investor group led by buyout firm TPG put some $7 billion into Washington Mutual Inc WM.N, the bank hard hit by mortgage losses.

It is unclear how much money Paulson would raise for the new fund and over what period of time. A spokesman for Paulson declined to comment. The news was reported earlier by Bloomberg News.

Paulson, which manages about $33 billion, is run by investor John Paulson. The firm's assets have swelled from about $7 billion early last year, both on investment gains and also asset growth from institutional investors.

(Reporting by Dane Hamilton and Svea Herbst-Bayliss; editing by Jeffrey Benkoe)