MONEY MARKETS-Interbank euro costs find new low

* 3-month euro, dollar, sterling costs mark record low

* Sterling market eyes Bank of England policy meeting

* Bank overnight deposits at ECB surge to record high (Updates with NYFR, changes byline, dateline, previous LONDON)

By Ellen Freilich

NEW YORK, July 6 (Reuters) - Benchmark euro, dollar and sterling interbank borrowing costs hit the latest in a series of record lows on Monday amid confidence central banks will keep the banking system flush with liquidity.

Three-month borrowing rates for U.S. banks were 0.5838 percent on July 6, according to ICAP's New York Funding Rate, above the 3-month dollar-denominated London interbank offered rate USD3MFSR= last fixed at 0.54813 percent.

ICAP's one-month NYFR USNYFR1M= was 0.3275 percent, also above the one-month dollar-denominated Libor rate USD1MFSR= last fixed at 0.30188 percent.

Analysts expect euro money market rates in particular to remain low on the European Central Bank's unprecedented 442 billion euro liquidity injection this month, although excess funds will start to drain off slowly as shorter-dated borrowings roll over.

The ECB maintained interest rates at a historic low 1 percent and said it was happy with the results of its near half-trillion-euro injection of 12-month funds.

There was concern, however, that banks were hoarding the extra cash instead of lending it with overnight deposits with the ECB surging to a record high on July 5, latest data showed. For more see [ID:nFAT004776].

The overnight deposits have risen since the central bank's one-year tender this month, prompting ECB President Jean-Claude Trichet last week to urge banks to pass on the benefits of the extra liquidity. The calls appear to have gone unheeded for now.

"A lot of banks are looking to repair their balance sheets ... keeping things very liquid as long as they can," said Kenneth Broux, markets economist at Lloyds TSB in London. "For central banks it's a big challenge; you cannot automatically bypass the banks and lend money to the economy."

ECB's Governing Council member Ewald Nowotny said there was no need to bypass the banking system at the moment to ensure credit reaches firms and consumers.

"For banks, it is in their own interest to provide credit," he told a news conference at the Austrian central bank.

"A strategy of taking money from the ECB and then putting it back into the deposit facility can only be short term." [ID:nWEA9730]

The three-month euro London interbank offered rate (Libor) for euro was fixed at 1.03625 percent EUR3MFSR= following the Euribor rate's continued fall to a record low 1.048 percent EURIBOR3MD=. See [ID:nL6200751] for latest Libor fixings.