CIT Group Inc is in talks with JPMorgan Chase & Co and Goldman Sachs Group Inc about short-term financing as it looks for ways to avoid bankruptcy, a source close to the company said on Friday, sending the lender's shares and bonds up.

Bankruptcy, however, is still possible over the next few days, and CIT, a 101-year-old lender that services nearly one million small- and mid-sized businesses, is continuing to talk with regulators about the situation, the source said.

Financing talks have turned primarily to arranging for a debtor-in-possession (DIP) loan for the lender in case of a bankruptcy, CNBC reported, adding that talks were also continuing for financing out of court.

JPMorgan and Morgan Stanley were in talks with other banks about a DIP loan, Bloomberg reported.

Meanwhile, CIT's bondholders were going to hold another conference call on Saturday, a source in the lender's bondholder group said.

They haven't thrown the towel, and they still are trying to work very hard to get some sort of funding, but at the end of the day I still think that there is a very high risk of a bankruptcy event, said Sameer Gokhale, an analyst at KBW.

CIT is in search of $2 billion to $3 billion of financing, according to the source, who declined to be identified because the talks were private. The company also is in talks with bondholders about a debt for equity swap, the source said.

But the source in the bondholders' group said many bondholders were pursuing a debt for new debt exchange and that a debt for equity exchange was not a real consideration.

The first source added one potential scenario is a sale of some assets to raise capital. The lender had wanted regulators' permission to transfer assets to its bank unit, but that did not happen, the source said.

It is just going to allow them to pass the next 30 to 60 days, but they have exhausted their balance sheet condition so fast that it was kind of breathtaking, said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.

The company's shares moderated early gains and closed up 29 cents, or 71 percent, at 70 cents, after more than doubling their price amid hopes of financing. The company lost 75 percent of its market value on Thursday as government talks for financing collapsed and bankruptcy loomed.

Standard & Poor's said on Friday that it was removing CIT from its S&P 500 <.SPX> market index as of July 24 after the close of trade, replacing it with software maker Red Hat Inc .

CIT's credit default swaps rose to about 51 percent as an upfront cost on Friday afternoon, according to Markit Intraday data, up from about 44 percent on Friday morning and up from about 48 percent late on Thursday.

The price of CIT's floating-rate notes due in August rose to 71.5 cents on the dollar in busy trading, from about 61 cents late on Thursday, according to MarketAxess, helped by news about the negotiations with Goldman Sachs and JPMorgan, bond fund manager Sean Simko said.

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The company sought additional help even after gaining the status of bank holding company in December so it could draw $2.33 billion of taxpayer money from the Treasury's Troubled Asset Relief Program.

But the Obama administration declined help, saying it had set high standards for granting aid to companies and leaving private investors as the one alternative to avoid collapse.

The impact of CIT's demise would likely pale by comparison with the collapse of investment bank Lehman Brothers Inc last September, analysts said.

If they can't survive, the market will resolve this for them and move on. I don't see massive systematic disruptions if CIT will not exist three months from now, Wirtz said.

Still, the ripples of a collapse could be widespread and worsen the effects of the economic downturn for some firms.

CIT has about $40 billion of long-term debt, according to independent research firm CreditSights. About $1.1 billion of debt will come due in August, followed by about $2.5 billion by year end.

The New York Post reported JPMorgan could acquire CIT's factoring unit, which finances more than $50 billion of wholesale inventory, at a time of the year when the collapse of the lender could disrupt retailers holidays plans.

CIT declined to comment and JPMorgan was not available for comment. But analysts cooled expectations of an asset sale.

It has some valuable franchises, but if they sell the assets in a distressed situation, they don't even get the par value for the assets. They will have to take losses and those losses will further weaken the balance sheet, so that doesn't seem to be a viable strategy, Gokhale said.

(Writing by Juan Lagorio; additional reporting by Chuck Mikolajczak, Burton Frierson, John Parry, Jennifer Ablan and Phil Wahba; editing by Leslie Gevirtz, Andre Grenon and Carol Bishopric)

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