MONEY MARKETS-Dlr bank rates edge up as credit woes linger

* Three-month dlr Libor ticks up as credit stress persists

* Three-month euro, stg Libor fall for 6th straight week

* U.S. money market funds survive historic low yields

* Fed's money market facility may narrow spreads

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By Kirsten Donovan and Richard Leong

LONDON/NEW YORK, Nov 21 (Reuters) - The amount banks charge each other for unsecured dollar funds edged up on Friday, showing credit woes are far from over, with liquidity dwindling and renewed problems in the financial sector.

Spreads between three-month interbank and policy rates showed persisting reluctance among banks to lend.

In other troubling developments, three-month dollar rates inched higher with evidence of a global recession continuing to mount. Worries intensified over the survival of U.S. automakers and the future of Citigroup (C.N), the No. 2 U.S. bank. For more, see [ID:nPEK8463].

"Getting risk back will be the greatest challenge today," said Thomas di Galoma, head of government bond trading at Jefferies & Co. in New York.

Some risk appetite returned, with Wall Street posting a modest recovery after Thursday's rout that sent it to its lowest level in 11 years.

"The whole market is on tenterhooks at the moment. The risk trade has come back into fashion very rapidly and banks have been suffering on equity markets," said David Keeble, Calyon's global head of interest rate strategy in London.

Such worries resulted in a sizable rally for government bonds and interest rate futures on Thursday, some of which fed through into Friday's fixing of London interbank offered rates, mainly in sterling and euros.

Three-month euro Libor rates EUR3MFSR= fell 5 basis points to 4.004 percent, the lowest since April 2007, while equivalent sterling rates GBP3MFSR= fell 3 basis points to 4.038 percent. Three-month sterling and euro rates ended lower for sixth straight weeks.

In contrast, the fall in three-month dollar rates USD3MDFSR= sputtered again. They edged up nearly half a basis point, at 2.158 percent. For more, see [ID:nLL306425]

MONEY FUNDS

Thursday's steep decline in Treasury yields revived concerns about the $3.6 trillion money market mutual fund industry, which was roiled by the bankruptcy of Lehman Brothers only two months ago.

After one of the largest U.S. money funds said its shares fell below $1, or "broke the buck," stemming from Lehman losses, the government quickly created backstops to support money funds in a bid to avert further deterioration in credit markets.

Since then, there have been concerns that falling Treasury yields and prospects of the Federal Reserve lowering its policy target rate near zero could pummel money market funds again.

With Treasury yields tumbling to historic lows on Thursday, no U.S. money funds broke the buck, according to fund tracker Lipper, which monitors 1,825 classes of U.S. money funds.

But these funds, which were once seen slightly riskier than cash, are not out the woods, said Jeff Tjornehoj, a Lipper senior research analyst in Denver.

If yields continue to stay this low, fund operators may have to use their own money to prop up shares so they do not fall below $1, according to Tjornehoj.

However, they cannot do that for an indefinite period. "There's simply is not enough yield to that," he said.

HELP ON THE WAY

There are some expectations that spreads, at least on dollar funding, could narrow next week when the Fed's cash facility for money market funds kicks in.

The Fed is expected to start lending to money market funds under its Money Market Investor Funding Facility, or MMIFF, from Monday, with Treasury bills earning nearly nothing.

"Next week's launch of MMIFF could, and hopefully will, redirect a portion of money market portfolios away from T-bills and back into more risky assets, including bank paper," Glenn Maguire, Societe Generale's Asian chief economist, wrote in a note. "This is an important link missing right now and preventing further normalization in bank funding."

However, strategists raised concerns that other looming government measures may counteract the benefits of MMIFF.

The Federal Deposit Insurance Corp plans to finalize a rule on Friday that offers guarantees to banks' new senior unsecured debt, though analysts say the cost could be prohibitive.

"There's some conjecture over whether the charges for these guarantees could be prohibitive and cause participants to opt out," said Nomura rate strategist Sean Maloney in London.

"In a nutshell, the safety valve that has been put under the system may not be as great as initially thought," he said. (Additional reporting by Vidya Ranganathan in Singapore; Editing by Dan Grebler)