MONEY MARKETS-Dollar, euro interbank costs fall

* Benchmark dollar, euro Libor rates at record lows

* 3-month sterling Libor at 5-week highs

* UK markets remain jittery over future of QE

* U.S. T-bill yields tame, Fed's balance sheet (Updates with U.S. T-bill market, Fed's balance sheet)

By Burton Frierson and Emelia Sithole-Matarise

NEW YORK/LONDON, Oct 22 (Reuters) - The interbank cost of borrowing dollars and euros fell to record lows on Thursday but the benchmark rate for sterling set a five-week high as prospects of more policy loosening by the Bank of England dimmed.

Ample central bank liquidity and expectations interest rates will remain low for months to come have kept money market rates close to record lows for most of the year.

Meanwhile, the surfeit of liquidity sloshing around in the system was illustrated by data from the Federal Reserve, who said its balance sheet -- a broad gauge of its lending to and support for the financial system -- grew in the latest week. [ID:nNYE002727]

U.S. T-Bill rates also declined <0#USBMK=>, bucking the rise in longer Treasury yields and indicating some investors were still flush with cash and preferred to keep it in safe-haven, short-term investments.

However, sterling rates have been rising over the past week as investors fretted over the future of the BoE's quantitative easing programme.

London interbank offered rates for three-month sterling edged up to 0.59500 percent GBP3MFSR= from 0.58625 percent, a day after minutes to the BoE's October meeting showed all nine policymakers voted to keep the size of the bank's asset purchase programme at 175 billion pounds.

"Since we had the statement recently from (BoE) Governor (Mervyn) King,...where he hinted at higher rates at some point in time in an explicit manner, markets in the UK are somewhat nervous," said Kornelius Purps, fixed income strategist at UniCredit in Munich.

"No one can...believe that tighter monetary policy is just around the corner in the UK but nervousness is high and we have the statement by the governor and this has led to a tremendous reaction in the market," he said.

Money markets showed little reaction to BoE Deputy Governor Paul Tucker's comments on Thursday that the central bank could extend quantitative easing if necessary.

Participants were looking to preliminary UK third quarter domestic product data due on Friday which many say will be key for the BoE's monetary policy meeting in November.

Earlier on Thursday, a BoE report showed the flow of lending to British businesses improved sharply in August but still remained negative, with major banks reporting a rise in spreads and fees on new lending. [ID:nLM356026]

In other currencies, three-month dollar and euro Libor fell to all time lows of 0.28219 percent USD3MFSR= and 0.68813 percent EUR3MFSR= respectively.

The European Central Bank, unlike the U.S. Federal Reserve and the BoE, has not embarked on a big asset purchase programme. Instead, it has pumped liquidity into the banking system via its refinancing operations, helping bring down interbank rates.

The ECB, which lent banks one-year funds at a rock-bottom one percent interest rates in June and September, has one more such operation in December.

The large amount of cash parked in the ECB's overnight vault indicates there is still ample liquidity. Banks deposited about 72 billion euros at the ECB's overnight facility, down from nearly 80 billion euros previously.

Deposits have risen since the ECB flooded money markets with almost half a trillion euros in the first injection in June of one-year funds.

(Reporting by Burton Frierson)