UPDATE 1-Fed, Treasury mulling commercial paper support

(Adds context on commercial paper)

WASHINGTON, Oct 6 (Reuters) - The U.S. Treasury Department and the Federal Reserve are considering additional steps to support strained commercial paper markets, a source familiar with the discussions said on Monday.

Among steps under consideration would be funding a special purpose vehicle as opposed to outright purchase of commercial paper, the source said. Strained commercial paper markets are seen as a major destabilizing force in financial markets.

The Fed and an interagency group that includes the Treasury hinted at those efforts earlier on Monday in separate statements.

"The Federal Reserve and the Treasury Department are consulting with market participants on ways to provide additional support for term unsecured funding markets," the statements said.

Aiding the commercial paper market may test the limits of the Fed's authority because of the possibility of losses. One way the government could get around that constraint would be for the Treasury to provide some buffer against losses, the source said. (Reporting by Mark Felsenthal; Editing by Jan Paschal)