WRAPUP 5-Bank lending hobbled as bailout bill becomes law

* U.S. rescue package goes into law, but stocks still fall

* 3-month USD Libor highest since Jan, euro Libor a record

* Central banks inject billions more short-term liquidity

* Overnight dollar Libor below 2 percent Fed Funds target (Updates with signing of bailout law, market reaction)

By Pedro Nicolaci da Costa and Jamie McGeever

NEW YORK/LONDON, Oct 3 (Reuters) - Interbank lending remained jammed up around the world on Friday even as investors gave a lukewarm reception to the passage of an anxiously awaited $700 billion U.S. financial sector bailout package.

Key benchmark interest rates for the banking industry extended their upward march. Three-month dollar Libor rates USD3MFSR= climbed to 4.33375 percent, the highest since early January, while the euro-denominated equivalent surged to a record.

This credit freeze was forcing central banks to continue flooding the global banking system with cash in an effort to lubricate stalled capital markets, which were suffering from a heavy dose of mistrust between financial institutions.

Such efforts have thus far failed to quell fears of insolvency related to a swooning American mortgage market, prompting calls for broader action by U.S. and European governments.

U.S. President George W. Bush swiftly signed the bailout package into law but the stock market ended 1.5 percent lower, an indication of the deep-seated nature of troubles in the financial sector. To read more see [ID:nSP58422].

"Events are moving awfully fast relative to policy," said Neal Soss, chief economist at Credit Suisse in New York. "The economy is weakening significantly and there's more of that ahead because the credit strains of earlier in the year have only intensified."

The U.S. labor market posted its worst performance in over five years in September, with 159,000 jobs wiped out. The pace of deterioration was so rapid, in fact, that faith in the ability of the rescue plan to stem the damage was waning.

There were also lingering doubts about implementing the bailout. A Treasury official said on Friday the department will hire five to 10 asset management firms to help handle the purchase of illiquid assets under the plan Congress approved.

The official, who requested anonymity, also said Treasury will take on about two dozen full-time employees to develop a process to ensure no conflicts of interest occur. Sources familiar with the plan also said the first of many expected asset sales would not take place for at least four weeks.

Earlier, the premium to borrow at Libor over anticipated policy rates, measured by average Overnight Index Swap rates, blew out further to around 290 basis points, a historic high.

Very short-term borrowing costs benefited from an inordinate amount of liquidity from central banks. Overnight dollar Libor tumbled almost 70 basis points to 1.99625 percent USDONFSR=, beneath the Federal Reserve's overnight target of 2 percent and the lowest in almost four years.