The Federal Reserve's balance sheet shrank in the latest week with a lower holdings of federal government and agency securities, Fed data released on Friday showed.

The Fed's balance sheet - a broad gauge of its lending to the financial system - stood at $2.853 trillion on November 21, down from $2.859 trillion on November 14.

The Fed's holdings of Treasuries totaled $1.650 trillion as of Wednesday from $1.657 trillion the previous week after it sold more debt than it purchased for its Operation Twist this week.

Operation Twist involved the Fed selling its short-dated Treasuries holdings and buying longer-dated ones on the open market in an effort to lower long-term borrowing costs. This program was expected to expire at the end of the year.

The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system slipped to $79.28 billion from $81.90 billion a week earlier.

The Fed's ownership of mortgage bonds guaranteed by Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB) and the Government National Mortgage Association (Ginnie Mae) totaled $900.58 billion compared with $889.02 billion the previous week.

The rise in agency MBS stemmed from the Fed's third round of quantitative easing, known as QE3. Its open-ended purchases of MBS are intended to help housing market with the goal to foster U.S. economic growth.

The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $5 million a day during the week from a $13 million a day average rate the prior week.