By Jim Christie

SAN FRANCISCO (Reuters) - At least a dozen U.S. public pension funds, including the nation's biggest, are mulling whether to put money behind the federal government's plans to rid banks' balance sheets of toxic assets.

The U.S. government hopes that if banks dispose of troubled assets, they will be better positioned to increase lending.

For their part, investors may scoop up the assets on the cheap with government-backed low-interest loans.

"People are exploring options which could potentially allow them to move forward," the chairman of one public pension fund looking at investing in the assets said on Monday.

"There is enough interest in the concept that people are going to try to work on options on how to potentially pursue it," said the fund official, who requested anonymity.

The official was one from a dozen public pension funds, including representatives of funds from California, New York and New Jersey, who with some state treasurers, including Bill Lockyer of California, discussed the U.S. government's plans on Friday by telephone with Sheila Bair, chairman of the Federal Deposit Insurance Corp.

The FDIC, which insures bank deposits and manages banks in receivership, and the U.S. Treasury are launching the Public-Private Investment Program to help sell distressed bank assets and are urging investors to join in.

The program will use government funds and private capital to buy up to $1 trillion (683 billion pounds) in distressed loans and securities. Investors would receive low-cost financing from the U.S. government to buy the "legacy" assets at auctions.