WASHINGTON (Reuters) - The Treasury Department is exploring how best to expand its capital injection program to provide more liquidity to credit markets and is considering specialty finance firms in the process, a source familiar with the government's thinking said on Tuesday.

The source said the Treasury is working diligently behind the scenes but is not expected to announce any program expansion in the coming days. The government is trying to figure out its next step after already allocating to U.S. banks the bulk of the $250 billion it has for capital infusions.

Under the current equity purchase program, federally regulated banks may sell the Treasury a stake of preferred shares in a program that is expected to drain $250 billion of the $700 billion financial rescue program passed by Congress last month.

A possible next step for Treasury investment could be extending help to specialty finance arms such as General Electric's (GE.N: Quote, Profile, Research, Stock Buzz) GE Capital unit, CIT Group Inc (CIT.N: Quote, Profile, Research, Stock Buzz) and others that provide financing to the broad economy, the source said.

A GE spokesman said on Tuesday the company does not expect the Treasury to offer it money from the bailout fund, but would listen to a proposal if one were made.

"This is not something we expect," said Russell Wilkerson, a spokesman for the U.S. conglomerate. "If it were offered, we would evaluate it."

CIT did not immediately respond to a request for comment.

GE shares were up 7.7 percent to $20.79, and CIT Group shares were up 33.4 percent to $6.03 on the New York Stock Exchange.

The news of a possible expansion of the Treasury's plan was first reported by the Wall Street Journal.

"We are looking at many ideas for strengthening the financial system and for restoring lending," Treasury spokeswoman Jennifer Zuccarelli said. "We are weighing ideas and have made no decisions."

A possible expansion of its aid programs could involve the Treasury aiding insurance companies and financial arms of other companies that do not have a federal regulator.

David Nason, U.S. Treasury assistant secretary for financial institutions, last week declined to rule out capital injections for insurers and other companies.

"We started with the banks because that's targeted to providing credit to the economy, but there are a lot of industries coming in saying they need federal assistance, so we're willing to listen to their asks," Nason said.

The Treasury is also examining how to purchase troubled assets from U.S. firms. Treasury Secretary Henry Paulson originally pitched the $700 billion bailout as a plan to soak up toxic mortgage-related assets that were weighing down balance sheets, likely through an auction process.

But government officials have not ruled out the possibility of directly purchasing assets to provide relief.

Federal Reserve Chairman Ben Bernanke has told lawmakers the government could "have auctions or other mechanisms to purchase these assets."

(Reporting by Karey Wutkowski and Patrick Rucker, additional reporting by Rachelle Younglai, David Lawder, Scott Malone, Dan Wilchins, and Ajay Kamalakaran; Editing by Dan Grebler)

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