MONEY MARKETS-U.S. borrowers gain on Europe's pain

* U.S. firms, government get cheap loans as investors fret

* Euro zone banks could borrow dollars as lenders dwindle

* Euro bank could sell U.S. commercial paper at 0.50 pct

* European banks rely more on FX market, ECB for dollars (Recasts, updates U.S. action, adds byline)

By Richard Leong

NEW YORK, Sept 13 (Reuters) - Washington and U.S. companies are benefiting from a flood of cheap cash as investors flock to U.S. money market investments on fears about a Greek default and its repercussions on Europe.

The safe-haven move comes as investors grow reluctant to lend dollars to French and other European banks due to their exposure to highly indebted euro zone nations.

On Tuesday, investors gave the U.S. government an interest-free loan for a month for a second week in a row, while Wal-Mart and other top-notch U.S. companies sold commercial paper at interest rates slightly above zero.

"Everyone is scared and there's nowhere else to go," said Joe D'Angelo, managing director of money markets at Prudential Fixed Income in Newark, New Jersey, which oversees $50 billion in assets.

Investors have reduced their holdings of euro zone bank paper this summer. Money market funds, securities lenders and corporate treasurers who still have appetite for euro zone money market securities are buying only issues that mature in less than a week, analysts said.

The biggest U.S. money market funds cut their euro zone exposure by $50 billion, to $316 billion in August. French bank debt holdings suffered the largest decline, falling $39 billion to $161 billion, according to J.P. Morgan Securities.

Since the first quarter with the flare-up in the European debt crisis, money market funds have pared their euro zone investments by $125 billion, with their ownership of French bank paper falling $59 billion, the firm said.

"While the decline in dollar funding to euro zone banks is sizable, we note that the amount of funding provided by U.S. money funds to those banks represent only a small percentage of their total liabilities," J.P. Morgan analysts wrote in a research note published on Friday.

They estimated the $2.6 trillion U.S. money fund industry finances slightly more than 2 percent of the total liabilities of the top 20 European banks.

U.S. BORROWERS GAIN

Investors, while reticent to lend to European banks, are channeling money into U.S. Treasury bills and ultra short-term corporate debt from credit-worthy U.S. companies.

The U.S. Treasury sold $27 billion of one-month bills on Tuesday at a high rate of zero. The bid-to-cover ratio, a measure of overall auction demand, came in at 5.69, matching the second-highest level ever at a one-month T-bill auction.

Elsewhere in the U.S. money market, Wal-Mart (WMT.N), the world's biggest retailer, and DuPont (DD.N), the No. 3 U.S. chemical company, sold commercial paper due in less than a month at 0.06 percent and 0.08 percent, respectively, market sources said.

Euro zone banks, on the other hand, could sell overnight to one-week U.S. commercial paper at a much higher rate of 0.50 percent.

RISING PAIN

In response to the dwindling access to private funding, European banks are paying higher interest rates to borrow dollars and increasingly relying on the European Central Bank to obtain dollars, analysts said.

Uncertainty over a second 109-billion-euro bailout for Greece and its repercussions on heavily exposed French banks -- BNP Paribas and other top French banks Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA) -- intensified on Tuesday after the Wall Street Journal cited an anonymous source at BNP Paribas (BNPP.PA) saying it had no access to dollar funding.

The French bank denied the report and described its dollar funding as solid and strong. For details, see [ID:nWEA4130]

A poor Italian government debt auction exacerbated worries about investor confidence in the euro zone and its policymakers' ability to contain the crisis. [GVD/EUR]

The cost of dollar funding, measured by three-month London interbank offered rates USD3MFSR=, rose to 0.34711 percent and access to dollars via cross currency basis markets EURCBS3M=ICAP was close to its most expensive levels since late 2008, at minus 111 basis points.

While the debt situation in Europe is grim, it is not as dire as some fear.

"They are still getting dollar funding elsewhere," said Deborah Cunningham, chief investment officer of money markets at Federated Investors in Pittsburgh, which oversees $355 billion in assets.

Banks borrowed 54.2 billion euros in 28-day funds from the ECB at a rate of 1.5 percent on Tuesday. [ID:nEAP50LD25] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Euro zone crisis in graphics r.reuters.com/hyb65p Graphic of euro/dollar spot and x-currency basis swap

link.reuters.com/cyz63s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Additional reporting by William James in London; Editing by Dan Grebler)