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* Lending to companies dips, household loans flat
* Banks in Italy and Spain gorge on government debt
* ECB seen leaving rates on hold after money supply data
* Constancio says ECB did not expect LTROs to solve crisis
By Paul Carrel and Sakari Suoninen
FRANKFURT/LONDON, March 28 (Reuters) - Banks cut lending to euro zone companies in February while those in Spain and Italy stocked up on government bonds, suggesting the flood of cash that the European Central Bank has pumped out has yet to bolster flagging businesses in the wider economy.
The ECB funneled over 1 trillion euros into the financial system with twin ultra-cheap funding operations in December and February to head off a credit crunch that risked exacerbating the euro zone crisis and threatening the currency bloc's future.
Governments are responding too by raising the "firewall" around the euro zone to prevent contagion, but ECB policymaker Jens Weidmann said this would only buy time and that governments must tackle the roots of the crisis.
Speaking in London, he said that "just like the 'Tower of Babel' the 'Wall of Money' will never reach heaven... If we continue to make it higher and higher, we will, in fact, run into more worldly constraints - both financial and political ones."
"We must realize that all the money we put on the table will not buy us a lasting solution to the crisis."
Weidmann, who also heads Germany's Bundesbank, called for countries with current account deficits and excessive public debt to implement structural reforms and consolidate budgets.
His comments are part of an ECB push to put the onus on euro zone governments to address the causes of the crisis, rather than looking to the central bank for help.
Indeed, the majority of economists in a Reuters poll on Wednesday expected the ECB's next move will be to hike interest rates from their record low 1.0 percent, although probably deep into next year at the earliest.
Weidmann is leading a push by a group of ECB policymakers for the bank to prepare for a shift to exit mode just a month after it completed the second of the lending operations - or LTROs - which doused the euro zone crisis at least temporarily.
ECB President Mario Draghi stressed on Monday the 3-year loans were aimed at preventing a credit crunch, not supporting sovereign debt markets - a view his deputy echoed on Wednesday.
"Our LTROs were to respond to the short-term funding pressure and nothing else," ECB Vice President Vitor Constancio said in Frankfurt.
"It never crossed our minds that we were solving the sovereign debt crisis with this (the LTROs)," he added. "Banks do not decide to give credit just because they have reserves."
February money supply figures released earlier on Wednesday showed the monthly flow of loans to non-financial firms fell by 3 billion euros ($4 billion) after rising by just 1 billion euros in January. The flow of loans to households was unchanged.
Banks tapped 489 billion euros from the ECB's first LTRO late last year, and took another 530 billion euros at the second operation on Feb. 29.
Additional ECB figures released on Wednesday showed Spanish as well as Italian banks increased their monthly net purchases of government bonds in February.
This will cheer many euro zone governments as evidence that banks are plying the "Sarkozy trade" - a term adopted by markets after the French president suggested that governments urge banks flush with ECB cash to buy their bonds.
The new data, which captured the period just before the ECB's record second injection of 3-year cash at the end of February, showed Italian banks increased their holdings of securities issued by euro zone governments by a record 23 billion euros, taking their total holdings to 301.6 billion euros.
Spanish banks increased their holdings of securities issued by euro zone governments by a hefty 15.7 billion euros. While the rise was smaller than January's record 23 billion, it left total sovereign holdings at a record 245.8 billion euros.
The data do not break down banks' holdings by issuing country but the presumption is they focused on domestic debt.
Darkening the euro zone picture, Deutsche Bank AG Chief Executive Josef Ackermann said questions over funding Europe's troubled banks remain, as emergency liquidity injections provide only temporary relief from an inter-bank lending crisis.
ING economist Carsten Brzeski said a credit crunch had still not been avoided in the euro zone despite the twin LTROs.
"Saying that in the coming months we are more likely to supply the economy with new loans and credit, right now that is wishful thinking," he said. "This entire discussion driven by the Bundesbank on the exit is clearly premature."
Orthodox economists in Germany worry that pumping money into the economy will inevitably lead to price rises. Germans' angst about inflation stems from the national experience of hyperinflation in the 1920s, when money became all but worthless and it took a wheelbarrow full of notes to buy a loaf of bread.
Data on Wednesday, however, showed inflation eased more than expected in March.
Draghi has suggested that the huge infusion of money is not an inflationary threat for now.
"The tentative signs we are seeing of a stabilization in money and credit growth do not signal increasing inflationary pressures over the medium term," he said in Berlin on Monday, adding that the ECB stood ready to keep prices in check.
Weidmann said he expected more economic divergence in the euro zone in the next few years and that Germany would see a rise in inflation pressures. Preliminary data on Wednesday showed German inflation slowed to 2.1 percent on the year in March from 2.3 percent in February.
Overall money growth in the currency bloc pointed to a slow recovery in the tight credit conditions at the end of last year that led the ECB to embark on the 3-year funding operations.
Euro zone M3 money supply grew at an annual 2.8 percent in February, up from 2.5 percent in January. A Reuters poll had pointed to a reading of 2.4 percent.
The three-month moving average of M3 growth accelerated to 2.3 percent, remaining well below the ECB's reference rate of 4.5 percent, above which the bank sees dangers to medium-term price stability. For table, see