* Iraq tensions fuel demand for top-rated assets
* Germany, the Netherlands sell T-bills at negative rates
* Wall of ECB liquidity to hit financial markets this week (Updates throughout)
By Marius Zaharia
LONDON, June 16 (Reuters) - Investors paid Germany and the Netherlands to keep their cash for periods of up to half a year at government bill tenders on Monday as escalating violence in Iraq fuelled flows into top-rated assets.
The European Central Bank's latest easing measures, which included cutting the rate it charges banks to keep their cash in its overnight deposits to below zero, also helped push short-term interest rates lower broadly.
Germany sold 1.5 billion euros worth of six-month bills at an average yield of minus 0.002 percent, which effectively means the government will give back less money than it borrowed when the bills mature.
The Netherlands sold 1.1 billion euros of three-month bills at minus 0.005 percent and eight-month bills at a zero yield, while France sold over 7 billion euros of various bills at rates slightly above zero.
Demand from investors was much higher than the amounts sold, partly reflecting increased concern that events in Iraq, where Sunni Islamist insurgents have taken control of the north of the country in the past week, could hurt global growth through higher oil prices.
The United States said it could launch air strikes and act jointly with its arch-enemy Iran to support the Iraqi government.
Yields on German two-year bonds, one of the go-to assets in times of geopolitical tensions, fell to their lowest in more than a year at 0.03 percent, with some analysts saying they could even turn negative in coming days.
"If there's a new bout of safety risk from Iraq, even the longer part of the German curve could turn negative," said Gianluca Ziglio, executive director of fixed income research at Sunrise Brokers.
Short-term bills are also in demand for their collateral value. If investors want to borrow money from secured lending markets, they have to post government debt as collateral.
In the secured market banks are able to borrow cash for longer periods at lower rates than in the unsecured market. But even there, traders said deals have been made at negative interest rates for maturities ranging from overnight to a few weeks on Monday.
The ECB's deposit rate of minus 10 basis points effectively charges banks for their extra liquidity and some of them prefer to lend it away at a slightly less negative rate to minimise their loss.
The overnight Eonia bank-to-bank lending rate settled at a record low of 0.026 percent on Friday and some analysts say it could settle in negative territory later this week as surplus cash in the banking system is set to jump.
The amount of cash euro zone banks have beyond what they need for their day-to-day operations is predicted to rise this week above 200 billion euros ($272 billion), from just over 112 billion euros, when the ECB stops withdrawing cash to neutralise the effect of the bond purchases it made at the height of the debt crisis.
"It is quite possible we will see negative Eonia rates in the next few days," said Alessandro Giansanti, rate strategist at ING. ($1 = 0.7345 euro) (Editing by Toby Chopra/Ruth Pitchford/Susan Fenton)