WRAPUP 3-Dlr Libor fall reflects continued money market thaw

* Dollar Libor falls; 3-mth Libor/OIS spread below 300 bps

* 2-yr dollar swap spread falls to lowest in a month

* C.banks gain traction as banks lend cash, hoard less

(Recasts, adds quotes, comment, Libor fixings)

By Jamie McGeever

LONDON, Oct 20 (Reuters) - The interbank cost of borrowing dollars fell sharply on Monday as banks grew more confident of lending rather than hoarding cash, an indication the global money market freeze continues to thaw out.

London interbank offered rates for overnight dollars fell to a four-year low near the Federal Reserve's target rate of 1.5 percent, one-week and three-month rates fell by almost half a percentage point and closely-watched three-month spreads back below 300 basis points.

At the height of the crisis earlier this months the spread was around 370 basis points.

In another sign central bank and government efforts over the last 10 days to get paralyzed money markets functioning again are succeeding, two-year dollar interest rate swap spreads fell to their lowest in a month.

Market participants on Monday pointed to dealers' reports from Friday that one large U.S. bank had lent up to $20 billion in one-month dollar funds, pushing one-month interbank rates below 4 percent from around 5 percent.

"It started on Friday with one large U.S. bank offering cash, and that brought down cash rates," said Francis Yared, strategist at Deutsche Bank in London.

"Policymakers are going to do everything they possibly can," to get liquidity flowing through money markets and hopefully out to business, corporates and households, he added.

The Wall Street Journal reported late on Friday that JP Morgan (JPM.N) led three U.S. banks pumping dollars into the system for European counterparts to access.

"They fall in to the category (very small) of quality banks where everyone has put their cash," said the head of rates trading at one bank, referring to JP Morgan.

A fall in dollar interbank rates is critical to getting gummed up global money markets functioning again.