By David Lawder and Jennifer Ablan

WASHINGTON/NEW YORK, July 2 (Reuters) - The U.S. Treasury will launch its public/private investment fund program to buy up toxic securities with an initial funding of $20 billion from public and private sources, a level scaled back considerably from initial plans, people familiar with the matter said on Thursday.

Nine funds chosen by the Treasury will raise about $1.1 billion each from private investors, and the Treasury will match that amount with taxpayer dollars, said the sources, who were not authorized to speak publicly about the plan. But they said the announcement and timing of the program's launch remains uncertain, the sources said.

A spokesman for the U.S. Treasury declined to comment.

The Public-Private Investment Program, or PPIP, was a key part of the Obama administration's early efforts to shore up a frail banking sector, aiming to cleanse banks' balance sheets of toxic mortgage assets that were choking off lending and eroding confidence in the financial system's viability.

After a sketchy initial outline disappointed markets in Feburary, U.S. Treasury Secretary Timothy Geithner announced ambitious details for the program in March to buy up to $1 trillion of securities and whole bank loans through public-private funds.

Since then, expectations about the overall toxic asset plan have been scaled back considerably as banks have proven they can attract private capital in both the equity and debt markets without first selling off illiquid securities.

What is more, sources familiar with the government's plan said the program's potency has been diluted due to a lack of seller enthusiasm on the part of banks and financial firms, and caution on the part of potential buyers regarding regulation.

"The market has already moved in a direction that may make the program unnecessary," said an investor familiar with the government's plan. "I don't think this is going to happen."