(Corrects Thursdy to Monday in paragraph three)
By Jamie McGeever
LONDON (Reuters) - The cost of borrowing overnight dollars on global money markets soared on Tuesday despite central banks pumping billions into the banking system to prevent it seizing up further after U.S. lawmakers' rejection of a financial rescue bill panicked markets.
The European Central Bank lent $30 billion dollars to banks overnight at a huge rate of 11 percent, reflecting banks' scramble for dollars to get them over the quarter end and after U.S. lawmakers rejected a $700 billion financial rescue package.
That's more than five times the Federal Reserve's 2 percent target rate and more than double the cost of borrowing dollars for three months as indicated by Monday's London interbank offered rate (Libor) fixing.
After the U.S. House of Representatives late on Monday rejected the $700 billion rescue package and sent Wall Street shares plunging, fears of further meltdown in Europe grew.
But in part buoyed by the Irish government's decision to guarantee all bank deposits and speculation central banks could cut interest rates in concert soon, the collapse of European equities failed to materialize.
Stocks erased initial losses to trade largely flat on the day <.FTEU3> <.FTSE>.
"Money markets are more of a problem than stock markets. Perceived counterparty credit risk ... probably won't go away for a while," said Everett Brown, strategist at IDEAGlobal.
He said interbank rates and premia over government borrowing costs and expected policy rates -- key gagues of financial market stress and investor risk aversion -- should come down from historically high levels in the coming sessions.
"They will come down a bit over coming days and weeks due to the U.S. package (probably) getting passed, more of these central bank liquidity operations going through, and the end of the quarter out of the way," he said.
The central banks of Japan, Australia, Britain and the euro zone injected liquidity into their respective banking systems on Tuesday to help banks meet funding obligations over the coming days, weeks and months.
A stark measure of banks' reluctance to lend to one another was their placing a record amount of overnight deposits at the European Central Bank on Monday worth 44.353 billion euros.
Reflecting the scarcity of funds in the interbank market, banks borrowed 15.481 billion euros overnight from the ECB, the highest in almost six years.
COORDINATED RATE CUTS?
The interbank cost of borrowing dollars for three months was indicated in a rough range of between 3.50 and 5.50 percent, the upper end of that the highest in a year.
The closely-watched TED spread, or the difference between these market-based dollar deposit rates and three-month U.S. government borrowing rates, fluctuated in a wide range of around 280 to 440 basis points in London, last hovering around 400 basis points.
That spread had ballooned to almost 500 basis points earlier this month, the widest in over a quarter of a century.
Australia, Britain and Europe are working to convince U.S. lawmakers to pass the $700 billion rescue package, which would allow the U.S. Treasury to buy up bad debt from banks, Australia's prime minister, Kevin Rudd, said on Tuesday.
The growing calls for closer cooperation is extending to potential coordinated interest rate cuts from the Fed and European central banks, even though they'd only do so as a last resort to instill confidence in financial markets, analysts say.
"There is a decent chance that European central banks ... will make emergency easing soon, perhaps this week, especially if the Fed is also ready to cut again," Citigroup strategists wrote in a note.
"Early easing (i.e. this week or next) may help reduce risks of a really severe financial collapse and deep recession (depression?)."
Interest rates futures markets are pricing in a two-in-three chance the Fed will cut rates by 50 basis points to 1.5 percent by or at its October 29 policy meeting.
Markets fully expect the ECB to cut a quarter point to 4 percent by the end of the year and to 3.75 percent by February.
On Monday, the Fed extended and more than doubled its currency swap lines with major central banks around the world to $620 billion dollars in an attempt to provide enough dollar liquidity to the global banking system.
(Additional reporting by Chikako Mogi in Tokyo, Michael Perry and Wayne Cole in Sydney, Ros Krasny in Nebraska)
