MONEY MARKETS-Dollar bank rates rise amid TARP worries

* Dollar 3-month Libor rises for third straight session

* Proposed TARP changes revive fears about tight credits

* European banks park cash with ECB instead than lending

* G20 fails to soothe money markets as year-end looms (Recasts, updates action, changes dateline from LONDON)

By Richard Leong

NEW YORK, Nov 17 (Reuters) - The amount banks charge each other to borrow dollars rose on Monday as proposed changes to the $700 billion U.S. bank bailout has renewed concerns about credit conditions and counterparty risks.

Adding to the market's anxiety was the perceived failure of the weekend meeting of Group of 20 nations to produce dramatic long-term steps to solve the credit crisis.

A sign of increased stress in the money market has been the uptick in the three-month dollar London interbank offered rate. This global benchmark, which is used to set interest rates on trillions of dollars of corporate and consumer loans, climbed for a third straight session following 23 straight declines to 2.23875 percent USD3MFSR=.

"The Libor fixings have stalled their rate descent in response to the altering of the TARP (conditions) however we do not expect a return to the higher levels," said John Spinello, Treasury bond strategist at Jefferies & Co. in New York.

Concerns about a fresh round of credit tension, together with evidence of a global recession, hurt stocks and fueled safety bids for ultra short-dated government debt.

The U.S. Treasury Department sold $89 billion in bills to strong demand. [ID:nTAR000820] [ID:nTAR000824] [ID:nTAR000814]

Meanwhile, money markets brushed off the Washington meeting of leaders from 20 of the world's leading rich and emerging economies, which analysts said fell short of concrete action to tackle the global economic and financial crisis.

TARP AND ZIRP

The renewed tension in dollar funding and general anxiety in interbank markets have rippled across financial markets since U.S. Treasury Secretary Henry Paulson last week abruptly shifted the focus of the Troubled Asset Relief Program (TARP) away from buying damaged mortgage assets.

Paulson suggested more TARP money be used to bolster bank capital and to create a joint program with the Federal Reserve to buy non-mortgage consumer debt such as credit card bills and student loans.

"It seems reasonable that confusion caused by the shift in the policy direction and by the potential for significant new debt supply could be weighing on Libor," J.P. Morgan Securities analysts Alex Roever and Cie-Jai Brown wrote in a research report on Monday.

Traders still expect the Fed to cut its short-term policy rate by another 50 basis points to 0.5 percent at its Dec. 16 meeting. Some analysts even reckon the Fed could move toward outright zero interest rate policy, or ZIRP, to revive the economy and financial system.

The gap between three-month dollar Libor over T-bill yields, the so-called TED spread, widened to a two-week high around 220 basis points, but the two-year interest rate swap spread, a gauge of risk aversion, shrank to 108 basis points from 112 basis points.

On the other side of the Atlantic, benchmark euro Libor/OIS spreads widened on Monday despite a fall in three-month euro Libor for the 28th straight session, fixing below 4.20 percent EUR3MFSR= for the first time since the credit crisis erupted in August last year. [ID:nLH119859].

Another example of banks' reluctance to part with their cash rather than making loans has been the stubbornly high level of overnight deposits commercial banks have been keeping with the European Central Bank. Their overnight deposits at the ECB rose to 164 billion euros as of Sunday from 127.5 billion reported on Friday. For more, see [ID:nWLB3849]

The ECB said on Monday it will begin accepting euro-denominated syndicated credit claims as collateral.

In Asia, the Bank of Japan pumped liquidity into the system to ease market stress spanning the year-end period, offering 800 billion yen in three-month funds. It also offered 3 trillion yen for one week and a one-day bond repo starting Wednesday. (Additional reporting by Jamie McGeever in London and Yidya Ranganathan in Singapore)