MONEY MARKETS-Interbank dollar rates edge up on year-end anxiety

* Dollar interbank rates stay high on year-end anxiety

* Fed and ECB still providing crucial liquidity

* Focus on central bank rate cuts (Updates to New York close)

By Emelia Sithole-Matarise and Chris Reese

LONDON/NEW YORK, Nov 28 (Reuters) - Interbank dollar funding rates edged up on Friday, revealing anxiety about cash supplies as banks prepare to close their books for the year-end even as many of them used government guarantees to issue debt.

U.S. banks' direct borrowing from the Federal Reserve at the discount window fell in the latest week, but the Federal Reserve's presence in commercial paper market rose, Fed data showed on Friday.

Banks' overall borrowings from the Fed averaged $283.18 billion per day in the week ended Nov. 26, versus an average $296.82 billion per day the week before.

Banks' primary credit discount window borrowings averaged $93.63 billion per day in the latest week, versus $91.55 billion the previous week.

Primary dealer and other broker dealer borrowings were $57.89 billion as of Nov. 26, versus $46.61 billion on Nov. 19.

Credit extended to American International Group, Inc., a new category in this week's Fed release, averaged $79.59 billion per day in the week ended Nov. 26.

The Fed's lending to banks to enable them to purchase asset-backed commercial paper from money market mutual funds was $53.31 billion as of Nov. 26, versus $61.92 billion on Nov. 19.

Proceeds from the U.S. Treasury's sales of Treasury bills in the Fed's supplementary financing account, which are helping to fund the Fed's support of financial institutions, were $479.05 billion as of Nov. 26, versus $508.96 billion as of Nov. 19.

The Fed's balance sheet liabilities were $2.091 trillion on Nov. 26 versus $2.171 trillion on Nov. 19.

The Federal Reserve continued to increase its role in the U.S. commercial paper (CP) market with net portfolio holdings of the Fed's Commercial Paper Funding Facility rising to $294.09 billion as of Nov. 26 versus $270.88 billion on Nov. 19, data on Friday showed.

Total U.S. commercial paper outstanding rose to $1.640 trillion in the week ended Nov. 26, up $26.2 billion from a week earlier.

The asset-backed commercial paper segment, which had helped to fuel the erstwhile housing boom that has turned to bust, expanded by $5.8 billion to a total of $746.8 billion in the latest week.

Unsecured financial issuance rose by $16.0 billion in the latest week, after rising by $11.2 billion the previous week.

WORST NOT YET OVER

Reinforcing the view that the worst was not yet over in money markets, European Central Bank President Jean-Claude Trichet said pumping in billions of euros and dollars into the system was still vital, and cutting back the amounts was still not an option.

The ECB is one of a string of central banks pumping in massive amounts of cash into markets to prevent banks from running out of money.

In Japan, the central bank carried out its biggest daily cash injection since lifting its quantitative easing policy two years ago as credit risks weighed.

Markets were also anticipating further interest rate cuts as central banks battle to shore up growth, with the ECB and the Bank of England monetary policy decisions due next Thursday. The U.S. Federal Reserve, which is getting close to the end of its easing cycle, is expected to cut again at its December meeting.

London interbank offered rates for three-month dollars rose to 2.21688 percent USD3MFSR= from 2.20250 percent on Thursday. Rates across the other maturities were also a touch higher.

The cost of borrowing three-month dollars, euros and sterling relative to expected central bank rates across all three currencies rose, most notably for sterling.

"I don't expect to see any magical reduction in Libor rates," said Padhraic Garvey, head of investment grade strategy at ING in Amsterdam.

"The Fed is probably going to cut again and I don't think Libor rates will match that cut. I think they will underperform that cut. We are still in as bad a situation now as we were a number of months ago," he said.

Spreads remained elevated despite evidence banks in Britain and in the United States were able to raise more funds under government guarantees.

JPMorgan Chase (JPM.N) sold $6 billion of FDIC-backed bonds, Morgan Stanley (MS.N) sold $5.25 billion and Goldman Sachs (GS.N) sold an inaugural $5 billion. [USC/]

Even the Federal Reserve's latest programme -- a $800 billion plan to buy mortgage- and consumer-related securities -- has yet to bring down money market risk spreads.

The Bank of England said it would offer 20 billion pounds when it holds an auction of three-month sterling funds on Dec. 2.

Counterparty risk worries remained very high, against a backdrop of deteriorating economic data though the volatility seen in stock market seemed to be ebbing.

The premium for three-month Libor borrowing over market-based expectations of official policy rates across all three currencies as measured by Overnight Index Swaps widened, particularly for sterling.

For more on Friday's fixings from the British Bankers' Association see [ID:nLS670848].

As banks prepare to dress up their balance sheets for year-end accounting purposes they're keeping as much of that funding as possible on their own books.

One measure of that is the latest European Central Bank data that showed that euro zone financial institutions parked 204.998 billion euros in overnight deposits at the ECB as of Nov. 27.

Although this was slightly down from the 216.9 billion euros the day before, it still highlights banks' preference to keep large amounts of cash in the central bank vaults rather than lend out.

The amount is still more than a quarter of the 790.503 billion euros the ECB has outstanding in open market operations as nervous banks continue to hoard money rather than lend it on interbank markets in fear that a borrower could become the next casualty of the financial crisis.