MONEY MARKETS-Yen rates fall further; euro market awaits ECB

* Interbank yen rates fall after liquidity steps

* Dollar/yen 3-month Libor spread narrows further

* Euro rates edge lower as market awaits ECB meeting

* U.S. one-month NYFR rate creeps higher
(Adds U.S. NYFR rate and Treasury bill rate, dateline
previously LONDON)

By Chris Reese

NEW YORK, Dec 2 (Reuters) - The interbank cost of borrowing
yen fell again on Wednesday, the day after the Japanese central
bank said it would provide more liquidity to the country's
banks, while euro rates fell ahead of the European Central
Bank's policy meeting.

Yen borrowing costs fell to their lowest since May 2006
after the Bank of Japan decided on Tuesday to pump more cash
into the banking system by offering 10 trillion yen in
three-month funds at a fixed rate of 0.1 percent.

The three-month yen London interbank offered rate (Libor)
JPY3MFSR= was fixed at 0.29000 percent compared with 0.29375
percent on Tuesday, narrowing the gap between the equivalent
U.S. dollar rate USD3MFSR= -- which fixed at 0.25500 percent
-- to 3.5 basis points from 3.8 basis points the previous day.

In August, the three-month yen Libor rate rose above its
U.S. dollar counterpart for the first time since May 1993
thanks in part to massive liquidity injections by the Federal
Reserve, which helped drive dollar Libor to record lows.

"The BOJ's immediate aim has probably been to weaken the
yen and thereby to relieve downward pressure on the Japanese
equity market," said Monument Securities chief economist
Stephen Lewis.

"In this, it has enjoyed modest success. However, it seems
likely that, to head off the risks of a downturn in Japanese
business activity next year, the BOJ will need to take further
measures."

For a graphic comparing dollar and yen Libor rates and
dollar/yen currency pair, click on:
here

In the United States, one-month and three-month borrowing
rates for U.S. banks rose slightly, but remained near the
record lows reached last week.

ICAP's one-month New York Funding Rate USNYFR1M= rose to
0.2381 percent on Wednesday from 0.2350 percent on Tuesday. The
rate remains not far off the record low of 0.2262 percent
reached on Nov. 19.

One-month Treasury bill rates US1MT=RR also rose on
Wednesday to 0.0837 percent from 0.735 late on Tuesday in some
selling as investors moved into higher risk assets.

ECB KEENLY AWAITED

Benchmark three-month euro lending rates EUR3MFSR= edged
down to 0.68000 percent as the market waited to hear from the
European Central Bank on Thursday, when it is due to outline
its first steps to scale back extraordinary support measures.
Ahead of that, the amount of cash deposited overnight at the
central bank jumped to 82.3 billion euros from 70.5 billion the
night before. [ID:nFAT006905]

The ECB will also tell banks at what rate they will be able
to secure 1 percent funds at what is likely to be its final
tender of 1-year money on December 16.

Most analysts expect the tender to be held at the ECB's
refinancing rate of 1 percent.

That despite ECB officials, including President Jean-Claude
Trichet, suggesting that either a spread could be added or the
rate indexed to another market rate such as 12-month Euribor,
currently at 1.236 percent EURIBOR1YD= or its equivalent for
secured loans, EUR1YRPFIX=FBE, currently 0.78 percent.
(Additional reporting by Kirsten Donovan in London; Editing by
Leslie Adler)
((chris.reese@thomsonreuters.com; Tel: +1 646 223 6073;
Reuters Messaging: chris.reese.reuters.com@reuters.net))