MONEY MARKETS-Euro Libor at new low as signs of lending rise

* Euro Libor at new lows as signs of lending pick-up seen * Excess liquidity abundant, money markets see offers

* BoE, Fed asset purchase programmes near end

By Kirsten Donovan

LONDON, Oct 27 (Reuters) - The rates at which banks borrow euros from one another hit new lows on Tuesday due to an abundance of excess liquidity and there were tentative signs that funds were starting to reach the wider economy.

Loans to euro zone households and firms fell for the first time on a year-on-year basis since records began in 1991 despite the European Central Bank lending banks billions of euros of extra funds and urging them to pass it on to customers [ID:nLR393676].

However, on a monthly basis, lending rose slightly and analysts cautioned not to read too much into gloomy headline figures, which are a lagging indicator.

Investors have been watching money markets closely since they froze in the financial crisis last year for signs that banks will begin to lend more, but the ECB's data may be a better indicator of whether funds are reaching the real economy.

"I'm not sure it will push the ECB that much (to begin its exit strategy) but it clearly tells you that that things are recovering both in terms of the real economy and the monetary data in a fairly consistent manner," said Neville Hill, an economist at Credit Suisse.

"Certainly I think it will make the ECB feel that they can roll these (extraordinary measures) off as they go through 2010 without too much concern at this point."

Excess liquidity remained abundant with nearly 90 billion euros parked back at the ECB overnight [ID:nFAT006862]. The availability of cash kept overnight lending rates pinned around 0.34 percent.

Benchmark three-month euro Libor rates marked a new low at 0.67875 percent [ID:nLR93808].

SIGNS OF LIFE

Banks took 48.7 billion euros of 1-week funds at the regular ECB tender on Tuesday, around a billion euros less than was maturing [ID:nECB000001]. With banks stuffed with longer-term liquidity from the ECB's extraordinary 12-month tenders, some are able to borrow short-term funds in the market cheaper than the central bank's flat rate of 1 percent.

"It's got a better feel to it and although it's still name rather than credit driven, there's more general offers around, even out to 1-year," said one trader.

Nine and a half billion euros of 3-month funds also mature this week and on Wednesday the ECB will announce how much of that has been rolled over.

ECB Governing Council member Erkki Liikanen said on Monday that the central bank will have more room to keep interest rates low if governments respect the use-by date on public support measures [ID:nLQ641398].

His comments are the first to link fiscal policy to possible interest rate moves, a more muscular approach than policymakers including ECB President Jean-Claude Trichet have taken so far.

The ECB is now a third of way through its 60 billion euro covered bond buying programme .

Meanwhile, three-month dollar Libor rates held at lows of 0.28063 percent, while equivalent sterling rates paused at 0.59375 percent. Both the Federal Reserve and the Bank of England are due to wrap up their respective $300 billion and 175 billion pound planned asset purchase programs this week. However, there is uncertainty whether or not the BoE will announce an extension to its programme at its policy setting meeting next week.