The Treasury Department announced Sunday night that tax-exempt money market mutual funds will be included under its temporary $50 billion insurance program for money market funds that it unveiled Friday, providing urgently-sought relief to market participants.

The announcement, a reversal of the previous stance the department had taken, came after the Treasury received many panicked phone calls from market participants over the weekend, warning that if tax-free funds were not included in the program, investors would withdraw their money from the funds in record numbers when markets reopened.

In order to obtain money to pay for the redemptions, it was expected that the managers of tax-free funds would exercise the put options on their funds' underlying variable-rate demand obligations, forcing banks to take back the securities and causing havoc in the banking industry, sources said.

In its one-page announcement, Treasury said that while the specific details of the temporary guarantee program are still under development, the program will be designed to cover shareholders for the amounts they held in tax-free and taxable money market funds as of the close of business Friday.

Further details on other aspects of the program, and the required documents for funds to participate, will be provided in the coming days, the treasury said.

Treasury officials originally excluded tax-free funds from the federal insurance program because under federal tax law, most tax-exempt bonds cannot receive a federal guarantee and retain their tax-exempt status.

While some market participants had suggested that Treasury might need legislation to include tax-free funds in the insurance program, a knowledgeable source said Sunday that the department will issue regulatory guidance as early as Monday that states the federal guarantee restriction will not apply to the tax-free funds.

According to Morningstar Inc., there are 279 tax-free money market funds that hold $553 billion of assets.

The $50 billion of guarantees for money market funds comes from Treasury's existing Exchange Stabilization Fund, which consists of U.S. dollars, foreign currencies and others and has been used in the past to provide emergency financing to foreign governments. President Bill Clinton deployed about $20 billion from the fund to provide aid to Mexico in 1995. The Treasury secretary has "considerable discretion" under the law to tap the fund, according to the Treasury Web site.

The Federal Reserve also opened its discount window to financial institutions to enable them to purchase certain assets from money market funds.

The administration's actions are aimed at stopping investors from pulling money out of their money market funds, which are not insured by the Federal Deposit Insurance Corp.

The administration also made clear over the weekend that it plans to spend up to $700 billion to purchase mortgage-backed assets from troubled financial institutions.

The Investment Company Institute and several mutual fund research analysts applauded the administration's temporary guarantee plan for money market funds on Friday.

"The steps [Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke] have taken should help fee up trading in commercial paper and other key markets in which money market mutual funds and others participants," ICI president and CEO Paul Schott Stevens said Friday. "We believe these actions will go a long way toward restoring order in the markets and building investor confidence after a period of extraordinary turmoil that has affected money market mutual funds and other financial products."

"The federal response by and large should stem the outflows at any money market fund shop that announces they are going to participate in the program," said Lawrence Jones, senior mutual funds analyst at Morningstar. "Given the federal response, I'd be surprised if we see too many more money market funds break the buck."

The Reserve Primary Fund, which had $62 billion in taxable assets as of June 30, fell below $1.00 to 97 cents on Tuesday as the fund, managed by Reserve Management Corp., was forced to write down debt from Lehman Brothers Holdings Inc., which declared bankruptcy on Monday.

The Putnam Prime Money Market Fund, with $15 billion in assets, was closed to redemptions on Wednesday after experiencing "extreme redemption pressure," Putnam wrote in a statement to investors.

"The tsunami is just starting to recede a bit so you may see some casualties wash up on the beach," said Peter G. Crane, president and CEO of Crane Data LLC, a money market research firm.

Reserve Primary Fund is the only money market fund known to have broken the buck, but a lot of fund managers might be seeing "0.998s" when calculating the net asset value of their funds, he said, adding that money markets may be getting an injection of equity from their parent companies rather than halting redemptions or dropping the NAV. Crane estimates that money market funds lost six to seven percent of their value last week.