UPDATE 1-Connecticut spurs local banks to make loans

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NEW YORK, Oct 9 (Reuters) - Connecticut Gov. Jodi Rell on Thursday unveiled steps to ensure community banks keep making loans to small businesses, including having each pay $1 million to a loan pool and hiking a guaranty program by $10 million.

The Republican governor in a statement also said she will ask the legislature to extend a law allowing municipalities to sell bond anticipation notes, so that they can raise cash to tide over any shortfalls caused by the financial crisis that has all but frozen many banks from lending money.

"I stressed to the bank officials that I am not asking them to make bad loans." Rell said after meeting with local bank officials. "I am not asking them to take on additional risk. I am asking them to work with our small businesses -- to send the message that Connecticut's banks are open and ready for business and that credit is available."

The list of Connecticut's publicly traded community banks includes Webster Bank (WBS.N), Peoples United Financial, (PBCT.O) and Rockville Financial Inc (RCKB.O), a spokesman for Rell said.

The plan calls for using the Connecticut's Direct Loan to Small Business Program to parcel out $5 million of low-cost loans to companies in sectors such as aerospace, medical devices and alternative energy.

The agency that runs the Urbank Loan Guarantee Program on Oct. 15 would be asked to set aside $10 million for companies with 50 to 200 workers. Rell said she would use $5 million from the Urban Bond funding to aid municipalities struggling to lure companies.

The law governing the period that bond anticipation notes can be sold in 2000 was doubled to eight years, and now many of these loans are coming due, Rell said. (Reporting by Joan Gralla; Editing by Leslie Adler)