MONEY MARKETS-U.S. rates futures firm, gains seen limited

* U.S. rates futures gain with Fed seen keeping rates low

* Euro Libor edges toward lows ahead of ECB

* Australian Libor jumps as more rate hikes eyed (Updates US action, changes dateline, previous London)

By Richard Leong

NEW YORK, March 2 (Reuters) - U.S. short-term interest rate futures firmed on Tuesday as traders raised bets the Federal Reserve will leave rates at rock-bottom to support a recovery.

Across the Atlantic, euro bank-to-bank loan rates dipped towards record lows as the market weighed what steps the European Central Bank might take this week to begin winding down its emergency lending programs.

Earlier, Australia's central bank resumed its rate-raising campaign, resulting in higher local interbank rates.

Back in the United States, weaker-than-expected data on jobs and housing together with tame inflation readings have reinforced the notion that the Fed will stick to its near-zero rate policy it adopted in December 2008, analysts said.

Moreover, Fed Chairman Ben Bernanke's pledge in testimony before Congress last week to stick to a super-easy monetary policy continued to resonate with traders who reckon short-term market rates have more room to fall.

Some analysts however cautioned that sentiment may be overblown with recent data skewed by inclement weather that may have temporarily slowed economic activity.

"So while the data may stay supportive of low rates (at least partially due to negative impact from bad weather), the upside is probably limited at current levels," said Sergey Bondarchuk, a U.S. interest rate strategist at BNP Paribas in New York.

Futures on federal funds, which the Fed targets for its monetary policy, were up 0.5 to 1.5 ticks.

The December contract FFZ0 implied traders expect the fed funds rate, or overnight costs banks charge each other to borrow excess reserves, to trade 0.43 percent at the end of this year. This was about 29 basis points higher than where the fed funds rate has been averaging.

In the cash market, Treasury bill rates ticked higher after an auction of four-week bills cleared at 0.080 percent, which was higher than last week's auction. For more see [ID:nTAR000034].

The spread between three-month T-bills and eurodollar futures TED, which narrows with increased risk appetite, briefly touched a record tight of 12 basis points, according to Reuters data.

ECB'S LIQUIDITY EXIT

While a rate hike is not on the table, ECB policy-makers will likely discuss on Thursday a plan to reduce the massive amount of cash they injected into the financial system to combat the global credit crisis.

In the third quarter, banks are set to repay a whopping 442 billion euros in 12-month funds.

The ECB is widely seen returning its tenders of three-month funds to a variable rate operation, rather than the unlimited fixed-rate allotment that has been in place since late 2008 when interbank lending markets ground to a halt.

Given expectations for weak euro zone growth in the first quarter and worries about Greek debt, some policy-makers are known to be pushing for current easy liquidity conditions to be extended. [ID:nLDE61P0R1]

The other unknown for markets is how much money banks will take at this month's offer of 6-month funds, potentially the last time the ECB will offer flat-rate longer-term financing.

With ample liquidity in the banking system for now, the London interbank lending rate on three-month euros EUR3MFSR= slipped for a fifth straight session to 0.59938 percent, barely above its record low of 0.59719 percent in mid-February.

Equivalent Libor on three-month dollars USD3MFSR= and three-month sterling GBP3MFSR= were fixed at 0.25194 percent and 0.64250 percent. [ID:nEAP000049]

Earlier in Asia, three-month Australian dollar Libor AUD3MFSR= fixed almost 6 basis points higher at 4.207 percent after the central bank raised its cash rate by 25 basis points to 4.0 percent on Tuesday and signaled further hikes ahead.

The Reserve Bank of Australia said a surprisingly strong recovery allowed it to move policy toward more normal settings. [ID:nSGE62101U] (Additional reporting by Kirsten Donovan and William James in London and Umesh Desai in Hong Kong; Editing by James Dalgleish)