UPDATE 3-Bank of Canada pumps most into markets since 2000

(Adds analysts, updates market reaction)

By Louise Egan

OTTAWA, Sept 15 (Reuters) - Canada's central bank on Monday pumped the biggest amount of cash into markets since 2000, while policy makers sought to shore up confidence after the deepening U.S. financial crisis claimed two Wall Street giants and shook world markets.

News of a bankruptcy filing by Lehman Brothers Holdings Inc LEH.N and the sale of Merrill Lynch MER.N jolted investors worldwide and in Canada raised concerns that a worsening U.S. economic outlook could harm Canada's economy further due to its heavy reliance on trade with its neighbor.

Distrust in short-term lending markets prompted the Bank of Canada to pour C$2.31 billion ($2.16 billion) into the overnight market to lower the lending rate toward its 3 percent target.

The amount of the transactions, in which the bank purchases securities in the open market and resells them the next day, was the biggest since Feb. 1, 2000, when it injected C$2.47 billion.

"The bank will provide liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets," the Bank of Canada said in a statement.

Central banks around the world were doing the same. The U.S. Federal Reserve pumped $70 billion of temporary reserves into the banking sector. The European Central Bank, as well as the German, French, British and Swiss central banks also offered extra cash to soothe markets.

"The pressures in the market are pretty acute when everybody's running for the safest instruments," said Craig Wright, chief economist at Royal Bank of Canada (RY.TO).

In the long run, the U.S. housing crisis and the resulting financial turmoil that exploded over a year ago could do more damage to Canada's economic growth than anyone would have predicted a few months ago, economists said.

That weakness, combined with easing oil prices, could prompt the Bank of Canada to favor interest rate cuts this year, especially if the Fed lowers rates on Tuesday as a growing number of analysts are now betting it will.

"On a go-forward basis, you get more concerned about the U.S. outlook the longer this uncertainty drags on. Obviously, from a Canadian perspective, that's a challenge for us," said Wright.

But the central bank said that while Canadian credit conditions remain difficult, the financial system is sound.

The country's banking regulator echoed that banks are well-capitalized and sturdy enough to weather major shocks.

"No special action is planned in response to the announcements from the U.S. because the Canadian banking system is safe and sound," Rod Giles, spokesman for the Office of the Superintendent of Financial Institutions, told Reuters.

Prime Minister Stephen Harper, in the middle of an election campaign, warned against excessive doom and gloom and repeated the government's frequent refrain that Canada's economic fundamentals are solid.

Canadian stocks, however, tumbled by 440 points, or 3.5 percent by Monday afternoon on worries about the financial crisis as well as on slumping oil prices.

The Canadian dollar fell to C$1.0694 to the U.S. dollar, or 93.51 U.S. cents, from C$1.0611 to the U.S. dollar, or 94.24 U.S. cents, at Friday's close.

The Bank of Canada welcomed moves by the Federal Reserve to support the ailing U.S. financial system. The Fed announced emergency measures and said for the first time it would accept stocks in exchange for cash loans, effectively relaxing the terms on which banks can borrow from the central bank.

The Bank of Canada is in regular contact with other central banks, but spokesman Jeremy Harrison declined to comment on Monday on the content of its discussions. (Reporting by Louise Egan; editing by Rob Wilson)