UPDATE 1-Three-month euro Libor eases, but spreads widen

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LONDON, April 28 (Reuters) - The interbank cost of borrowing three-month euro funds eased on Monday for the first time in more than two weeks but spreads over secured lending widened, suggesting continued money market stress.

Three-month dollar London interbank offered rates also slipped ahead of a widely expected 25 basis point interest rate cut by the Federal Reserve later this week, the British Bankers Association's latest daily fixing showed.

Three-month sterling rates edged lower for a third session, extending their decline after last week's Bank of England's 50 billion pounds liquidity plan.

See [ID:L2857657] for the Libor table.

"Sterling rates have got some respite from the (BoE) relief package but in Europe the appetite for cash is such the last ECB tender was absorbed pretty quickly but it's still not getting recycled back into the market. That said, we're probably quite close to the top, we don't see it going a great deal further," said a money market trader in London.

"The appetite for cash is still very much there. There are offers very slowly creeping back into the markets but they're very selective who they can lend to, that's up to three months, after that it's still very difficult."

Despite central bank efforts, banks are still unwilling to lend to one another as they repair their balance sheets battered by a global credit crunch stemming from the slumping U.S. housing market.

Hawkish comments from European Central Bank officials last week sent short-term market rates higher as investors started to bet on the prospect of an interest rate hike late this year.

However, data on Monday showing inflation slowing in five German states in April suggested price pressures in the euro zone may be ebbing. If so, the case for a rate rise would also diminish.

ECB President Jean-Claude Trichet repeated on Monday that current euro zone interest rates of 4 percent, where they've been for almost a year, will contribute to achieving price stability.

He also said that central banks' liquidity operations "cannot address the underlying causes of the financial turmoil."

"Liquidity interventions aimed at restoring orderly trade conditions in money markets and maintaining short term interest rates close to our policy rate were not compromising in any respect the longer-term achievement of price stability or being complacent with imprudent behaviour by market participants," Trichet said in Vienna.

The U.S. Federal Reserve's policy-setting committee meets this week and futures markets show an 82 percent probability of a quarter-point cut in the 2.25 percent fed funds rate on Wednesday FEDWATCH. (Reporting by Ian Chua and Kirsten Donovan)