MONEY MARKETS-Interbank dlr, euro rates fall on U.S. QE view

* Three-month dlr Libor eases on more QE expectation

* Euro Libor rates lower after 3 sessions of holding steady

By Emelia Sithole-Matarise

LONDON, Sept 22 (Reuters) - The interbank cost of borrowing
dollars and euros eased on Wednesday as money markets priced in
the possibility of renewed purchases of U.S. government debt and
the strengthened view that rates will stay low for a long time.

The Federal Reserve revived the possibility of more
quantitative easing on Tuesday after it left monetary policy
unchanged but said it stood ready to provide more support for
the economy and expressed stronger concerns about low inflation.
[ID:nN20109053]
Market participants, however, expect short-term money market
rates to stabilise around current levels as the liquidity
injection from any renewed purchases of Treasuries by the
Federal Reserve would lift longer-dated Treasuries.

Benchmark three-month dollar London interbank offered rates
USD3MFSR= edged down to 0.28938 percent from 0.28969 percent,
hugging their lowest levels since the end of April.

Equivalent euro Libor EUR3MFSR= fell after holding steady
for three sessions as the prospect of looming European Central
Bank loan maturities led some banks to holding back from
offering cash in the market. Three-month euro Libor fixed at
0.82625 percent versus 0.82875 percent on Tuesday, according to
the latest fixings from the British Bankers' Association.

The two-year U.S. yield US2YT=RR fell to a record low of
0.407 percent on expectations the central bank would hold
short-term rates near zero even longer than previously thought.
The two-year yield note yielded 0.428 percent by 1440 GMT,
bouncing off slightly from that all-time low.

"I don't think the (money) market can rally significantly
but there's little risk to see the market selling off sharply
because we are clearly in a situation where central banks will
remain accommodative and very accommodative for long," said
Patrick Jacq, an interest rate strategist at BNP Paribas.

Expectations for the Fed's first interest rate hike moved to
a slightly later date, according to a Reuters poll of primary
dealers on Tuesday after the Fed policy meeting. [FED/R]

Nine of the 16 respondents saw the Fed holding rates steady
at 0-0.25 percent through the end of 2011. At the time of
Reuters' poll of primary dealers on Sept. 3, eight dealers
predicted rates would be unchanged for all of 2011.

"It appears to be a case of not if but when the Fed embarks
on further quantitative easing and/or other policy
accommodation," Credit Agricole CIB strategist said in a note.

"The decision will ultimately be data dependent but the bias
has clearly shifted towards more balance sheet expansion and
like many in the market the Fed will pay close attention to
upcoming data releases."

(Editing by Toby Chopra)