* Libor fall overshadowed by economic worries
* Three-month sterling Libor lowest since May 2004
* Banks still reluctant to lend despite lower rates
* U.S. commercial paper issuance falls again (Recasts, changes byline, dateline, previous LONDON)
By Richard Leong
NEW YORK, Nov 7 (Reuters) - Global bank rates fell on Friday a day after steep policy easing in Europe but the credit thaw was overshadowed by signs the world economy is facing its worse crisis in decades.
A decline in interbank rates since early October has spurred hopes the worst of the global credit freeze is over but the improvement has been uneven, with evidence of a persistent struggle for companies and consumers to obtain loans to finance inventories and buy homes, analysts said.
U.S. carmakers General Motors
GM and Ford signaled more layoffs to come, hours after the U.S. government reported 240,000 jobs were slashed in October, and the jobless rate hit a 14-1/2-year high. [ID:nN07391875].
"Despite all the liquidity coming into the system banks have been not lending but in fact have been tightening their lending standards," said Lindsey Piegza, market analyst at FTN Financial in New York. "They are still insecure about other banks' balance sheets and the consumers."
Financial institutions deposited a record 297 billion euros in overnight funds at the European Central Bank rather than lend it. The ECB warned credit conditions could tighten further.
Outside the banking system, U.S. commercial paper issuance renewed its decline on Thursday, despite the Federal Reserve buying a vast sum of longer-dated paper to support this critical source of funding for many U.S. companies.
Still the persistent fall in interbank rates remains the most encouraging sign that massive central bank efforts have helped to restore stability in the financial system.
STERLING LIBOR PLUNGE
For a second day, the most dramatic move in the daily fixings of London interbank offered rates (Libor), a global rate benchmark, was in sterling.
Three-month sterling Libor
Overnight Libor on sterling
Dollar and euro Libor also fell sharply with their spreads narrowing versus expected policy rates.
However, the drop in bank-to-bank lending rates has yet to spur economy activity, some analysts said.
"We have a recession on our hands. And that's the big problem: getting money out to companies and households. So you can't extrapolate declining Libor rates and say everything is now all right," said Kenneth Broux, financial markets economist at Lloyds TSB in London.
CP MARKET IN FLUX
Unlike interbank rates, the U.S. commercial paper market remains in flux. Daily commercial paper issuance has trended lower since the Fed launched its CP purchase program nearly two weeks ago. The Fed's Commercial Paper Funding Facility was created as a backstop for this credit sector hammered by the bankruptcy of investment bank Lehman Brothers in September.
Commercial paper supply slipped to $141.80 billion on Thursday from Wednesday's $158.84 billion, Fed data showed.
Indeed, the Fed's CPFF has expanded rapidly. It averaged $226 billion per day in buying top-rated, three-month commercial paper in the week ended Nov. 5, up from a daily rate of about $41 billion previous week.
The Fed as the buyer of last resort made it cheaper for companies like GM to sell their commercial paper.
On Friday, it held the rate it charges to buy eligible unsecured 30-day CP at 1.54 percent for a second day.
This compared with a quoted rate of 3.00 percent on 30-day
paper
The CPFF together with other central bank programs have done much to calm the chaos plagued the money market a month ago, but there have been growing worries they may have come too late to resuscitate a flagging global economy.
"We are better than where we were a month ago," said FTN's Piegza. "But the economy may not be sound to enough to benefit from these liquidity programs." (Additional reporting by Jamie McGeever in London; Editing by James Dalgleish)