U.S. money markets returning to normal after Sandy

* U.S. repo rates approach pre-Sandy levels

* A large money fund firm sees assets returning

* Modest bounce in commercial paper activity

NEW YORK, Nov 1 (Reuters) - U.S. money markets showed signs of returning to normal on Thursday after a devastating storm disrupted major markets earlier this week and caused Wall Street firms, U.S. banks and companies to scramble for cash.

Money markets are a vital cash source for financial markets, where Wall Street finances trading positions and loans and Corporate America raise funds for inventories and to meet payrolls.

On Thursday, money market mutual funds and other cash investors reduced what they charge Wall Street firms and banks on overnight loans, while corporate treasurers shifted money back into money funds after withdrawing heavily from their accounts in preparation for Hurricane Sandy.

``There was a bit of cash hoarding with Sandy. Those flows have pretty much reversed themselves,'' said Deborah Cunningham, chief investment officer of money markets at Federated Investors in Pittsburgh.

Federated is one of the biggest U.S. money fund operators.

Money market fund assets fell by $51.13 billion to $2.507 trillion for the week ended Oct. 30, according to a report published by iMoneyNet on Wednesday. The weekly drop in assets, which intensified on investors' month-end cash needs, was the biggest one since a $103.21 billion fall in the week ended Aug 2, 2011.

The decline in assets resulted in less cash for money funds to buy investments such as repurchase agreements (repo) and commercial paper, which trading houses and corporate treasuries use to raise short-term cash, analysts said.

In the $1.8 trillion tri-party repo market, the interest rate on an overnight loan, against which U.S. Treasuries and other securities are pledged as collateral, was quoted as high as 1.25 percent on Monday. That was five times higher than where the overnight repo rate was trading a week earlier and a level not seen since during the height of the global financial crisis in late 2008.

As of Thursday, overnight repos traded at 0.24-0.25 percent on nearly normal volume after they opened at 0.30-0.35 percent. They ended at 0.35-0.40 percent late on We dnesday.

Trading on longer-term repos remained light, however, with staff at many investment houses and trading firms still running below normal, investors and traders said.

The $948 billion commercial paper market showed a modest bounce after it was nearly grounded when the bond market was closed on Tuesday, the day after Sandy swept across the densely-populated Northeast region, leaving at least 82 dead.

Data from the Federal Reserve showed 84 commercial paper issues worth $2 billion were sold on Wednesday, compared with 30 issues worth $1 billion sold on Tuesday.

Companies rushed to sell 206 issues of short-term IOUs, worth $7.38 billion, on Monday before Sandy approached the Northeast, according to Fed data.

``Any CP rollovers occurred on Monday,'' Cunningham said.

Still, the amount of commercial paper outstanding contracted by $20.7 billion to $945.8 billion in the week ended Oct 31, the latest Fed data showed.