The size of the U.S. commercial paper market deflated to its smallest in at least 16 years in step with a rapid shrinkage of institutional prime money market fund assets ahead of new regulations that will go into effect next week, Federal Reserve data showed on Thursday.

U.S. seasonally adjusted commercial paper outstanding fell $30.2 billion to $916.3 billion in the week ended Oct. 5, the lowest level going back to 2000 with the available Fed data.

The accelerated decline of commercial paper purchases by prime funds in recent weeks have increased the short-term corporate borrowing costs, analysts said.

Companies issue commercial paper to raise cash to finance their inventories and payrolls, while financial institutions use proceeds from these short-term debt to fund their trades.

Institutional prime money funds have been converting over to government-only funds in a bid to be exempt from Security and Exchange Commission rules on share prices, redemption and fees which are scheduled to take place on Oct. 14.

In a year, this type of funds which had been major buyers of commercial paper has shifted about $1 trillion of assets into the government-only category, according to iMoneynet data.

Assets of institutional prime funds tumbled by $122.30 billion to $223.33 billion in the week ended Oct. 4, marking its biggest single-week drop in eight years, iMoneyNet said on Wednesday.

That drop was worth $262.96 billion in the week of Sept. 23, 2008 after the Reserve Primary Fund's share value fell below $1 or "broke the buck" shortly after the collapse of Lehman Brothers during the global financial crisis, according to iMoneynet.

Non-seasonally adjusted commercial paper outstanding - which some analysts consider a more reliable reading than the seasonally adjusted one since it has been distorted by the financial crisis - fell $32.5 billion to $929.6 billion.

This was also the lowest level for this data series going back to 2000.