UPDATE 1-Libor volatility due to poor liquidity-JPMorgan

(Adds details, quotes from head strategist)

NEW YORK, May 16 (Reuters) - The Libor interbank rate-setting process is not broken, and recent rate volatility can be blamed largely on reluctance among banks to lend to each other amid the current credit crunch, JPMorgan said on Friday.

JPMorgan (JPM.N: Quote, Profile, Research, Stock Buzz) is one of the 16 banks surveyed by the British Bankers' Association daily to set or "fix" the daily London Interbank Offered Rates on overseas dollar deposits.

"The question of whether a benchmark could be designed that is less flawed than Libor is debatable," JPMorgan analysts said in a note published on Friday.

"Everyone is funding at a similar level, but when credit conditions worsen and we have periods like this of unprecedented turmoil, the reality is there is not a single borrowing rate," Terry Belton, head of global fixed income strategy at JPMorgan, said in an interview on Friday.

"This fixing -- it is what it is -- and it is doing I think what is designed to do properly. That is, it takes 16 very high quality, very large banks...to capture kind of an indicative rate for a prime bank."

The spread of three-month Libor and three-month overnight index swap (OIS) rate, a gauge of banks' aversion to lend to each other, was hovering at historically wide levels until recently.

But JPMorgan analysts said the difference between the two rates will shrink sharply in the coming months in response to efforts by global central banks to increase liquidity.

The increased liquidity measures by central banks along with increased term funding by financial companies are the main drivers, they said.

(Reporting by Richard Leong and Jennifer Ablan;)