TREASURIES-Yields fall on panic flight, easing talk

SYDNEY, Oct 10 (Reuters) - U.S. Treasury yields fell in Asia on Friday as investors fled tumbling equity markets to the relative safety of sovereign debt, showing the desperate need for urgent action by global policy makers.

With Japan's Nikkei share average down over 10 percent .N225 in the wake of a 7.6 percent dive in the S&P 500 .SPX, investors rushed to the most liquid end of the Treasury curve.

Rates on one-month T-bill rates fell to just 0.045 percent, from 0.080 on Thursday and 1.55 percent as recently as Sept. 11.

The 10-year note US10YT=RR rose 21/32 in price, taking its yield to 3.70 percent from 3.78 percent. And the 10-year Treasury note future TYc1 jumped 1-8/32 to 114-25/32.

The mayhem in stock markets stoked talk that the major central banks would have to cut interest rates again, just days after a concerted round of easings led by the Federal Reserve and European Central Bank.

There were also reports the U.S. Treasury was under intense pressure to inject funds directly into commercial banks right now, rather than at the end of the month as first suggested. The pressure on bank funding was clear in London Interbank Offered Rates LIBOR for three-month U.S. dollars, which surged to 4.75 percent on Thursday, from 4.52 percent the day before and just 2.88 percent less than a month ago.

That in turn widened the spread over expected official overnight rates to a record of 347 basis points, up from 322 basis points on Wednesday.

The rising cost of borrowing came despite the Federal Reserve lending a record $420 billion a day to banks at its discount window in the week to Oct. 8. That was on top of massive U.S. dollar lending by major central banks across the globe.

"Unfortunately coordinated central bank action has had no impact on term funding," noted Adam Carr, a senior economist at broker ICAP.

The problem was that banks have raised insufficient capital to effectively deal with the asset price deflation scourge, he added. This prompted the U.S. Treasury to propose taking direct equity stakes within the next couple of weeks, but now it looked like they did not have the luxury to wait.

With the Group of Seven rich countries meeting in Washington on Friday, investors were hoping they could agree on immediate action, including more rate cuts.

"It highlights the enormity of the issue and the problem faced by the G7," said Carr. "Given the muted response in markets, certainly I think more rate cuts are to come, as ineffective as they are proving. Lets hope the G7 propose a good dose of fiscal medicine to the real economy as well."

Eurodollars <0#ED:> were higher across the curve as investors priced in more easing from the Fed.

Two-year Treasury notes US2YT=RR were up 2/32 in price on Friday, edging yields down to 1.49 percent from 1.53 percent late in New York. (Reporting by Wayne Cole; Editing by James Thornhill)