MONEY MARKETS-U.S. rate markets rally on sovereign fears

* U.S. rates ease as stock slide spurs safety bid

* U.S. rates futures rally, Fed seen holding rates longer

* 3-month Libor euro, sterling rates unchanged

* No major surprises from ECB and BoE as rates held steady

(Updates U.S. market action, changes byline, adds new quotes)

By Richard Leong

NEW YORK, Feb 4 (Reuters) - U.S. short-term interest rates markets rallied on Thursday as growing anxiety over fiscal problems in Europe unleashed a stampede into low-risk dollar assets, analysts said.

This flight-to-safety, plus an unexpected rise in U.S. jobless data, led to a surge in rates futures with deferred contracts hitting fresh highs. The move implied traders were betting the U.S. Federal Reserve may stick to its near-zero rate policy longer than previously thought, analysts said.

Across the Atlantic, benchmark rates futures in the region also rose after the Bank of England and European Central Bank left their policy rates at record lows.

"It's a deleveraging trade that's taking place. Rates are going to be low for a longer time," said John Brady, senior vice president with MF Global in Chicago.

Late 2010 futures on U.S. federal funds, or overnight lending of excess reserves between U.S. banks which the Fed targets, suggested reduced expectations that the Fed will impose its first rate increase by year-end.

"While the world is going through a global deleveraging, the Fed is not going to raise rates," Brady said.

Another troubling trend has been a contraction in the U.S. commercial paper (CP) market, a vital source of short-term funds for companies.

The size of the CP market shrank by $24.2 billion to $1.123 trillion in the week ended Feb 3, Fed data released on Thursday showed. For more, see [ID:nN04108147]

BOE, ECB HOLD RATES

Interest-rate sensitive Euribor and short-sterling futures rose, driving their implied yields lower, after the BoE and ECB left their benchmark interest rates unchanged at record lows of 1.0 percent and 0.5 percent, respectively.

The BoE left the door open to more quantitative easing if needed.

Benchmark interbank rates were also little changed with the three-month London interbank offered rates for euros and sterling fixed at 0.60625 percent EUR3MFSR= and 0.61563 percent GBP3MFSR=, steady from Wednesday.

The equivalent rate for dollars USD3MFSR= was set slightly lower at 0.28475 percent -- retesting the record low first plumbed in December. ((See [ID:nEAP000030] for full Libor fixings))

"An ECB rate hike doesn't seem to be on the cards until the second half of this year, so that sounds pretty dovish, giving support to the short-end." said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh.

He said the ECB remains cautious about the economic outlook and expects only a modest recovery this year.

ECB President Jean-Claude Trichet said on Thursday it was vital Greece meet its goals for cutting its budget deficit, calling steps announced by the government this week encouraging.

The ECB gave no new clues on its plan to gradually scale back its extraordinary liquidity measures, with Trichet saying the central bank will make a decision in March.

The liquidity provided by major central banks to help lubricate money markets has pushed short-end market rates and interbank lending rates sharply lower. (Additional reporting by Ellen Freilich in New York; Ann Saphir in Chicago and Ian Chua in London; Editing by Andrew Hay)