NEW YORK, Jan 7 - The U.S. commercial paper market had its biggest weekly percentage contraction in a decade, suggesting companies were nervous about the prospects for a sustained economic recovery, analysts said.

Businesses use short-term borrowing to finance restocking of shelves and pay wages, so the paring back of such debt issuance hints at worries that economic growth may falter again, after the longest U.S. recession in decades ended in 2009.

For the week ended Jan. 6, the size of the U.S. commercial paper market, a vital source of short-term funding for companies' day-to-day operations, fell by $94.2 billion to $1.076 trillion outstanding, from $1.170 trillion outstanding the previous week, Federal Reserve data showed on Thursday.

Businesses remain nervous about the pace of economic expansion over the next one or two quarters, said Dan Greenhaus, chief economic strategist with Miller Tabak & Co. in New York.

After the global credit crisis chopped the market's size by almost half over two years, in late 2009 the market expanded for about three months, before its recent contraction.

It's been trending lower since the end of October, Greenhaus said. The (economic) rebound was one of the things that was supportive of things getting better, but there is a limit to how far this went if end demand wasn't materializing.

However, other factors may have caused this week's plunge in commercial paper.

Seasonal distortions may have exaggerated shifts in the commercial paper market, said Ray Stone, economist with Stone & McCarthy Research Associates, in Princeton, New Jersey.

On a non-seasonally adjusted basis, the commercial paper market grew by more than $7 billion in the latest week, Stone said.

Also, many banks are trying to reduce their reliance on shorter-maturity issuance for fear of the type of swift rise in short term rates that brought down Bear Stearns and Lehman Brothers during the global financial crisis.

As this hefty week for corporate bond issuance in the United States underscores, many financial firms are trying to issue longer maturity corporate notes and bonds instead, analysts said. See [ID:nN05116516].

This great week of corporate issuance, particularly for financial maper may mean less issuance of commercial paper and more issuance of longer-term debt, Stone said.

Unsecured financial issuance fell by $36.6 billion after rising by $9.2 billion the previous week.

U.S. asset-backed commercial paper fell by $66.3 billion to $419.5 billion outstanding in the latest week from $485.8 billion outstanding the previous week.

The overall U.S. commercial paper market peaked at about $2.2 trillion outstanding in August 2007 when the credit crisis started. (Editing by Theodore d'Afflisio)