LONDON, March 17 (Reuters) - The cost of borrowing overnight dollar funds on the interbank market soared on Monday as the financial market crisis deepened following a fire sale of investment bank Bear Stearns and an emergency Federal Reserve cut to a key lending rate, making banks extraordinarily reluctant to lend to each other.
Overnight dollar London interbank offered rates (Libor) jumped by more than 80 basis points, the biggest daily increase since the September 11, 2001 attacks at a stroke siezed up interbank liquidity and heightened counterparty risk.
Overnight dollar Libor rose to 3.86250 percent from 3.05375 percent on Friday, but three-month rates pushed further below 3 percent as the market bet on hefty rate cuts from the Fed at its scheduled policy meeting on Tuesday.
Euro and sterling 3-month rates also pushed higher, according to the British Bankers Association, with sterling rates reaching their highest this year at 5.95875 percent and euro rates just shy of their highest this year at 4.65813 percent.
Traders said money markets had all but ground to a halt on Monday, with banks intensely suspicious of lending to one another. Meanwhile, stocks tumbled and government bonds soared as funds sought a safe-haven.
Despite co-ordinated central bank moves last week to inject liquidity into the system, the gridlock intensified. In an unexpected move late on Sunday the Fed lowered the discount rate on direct loans to banks to 3.25 percent from 3.5 percent and implemented steps to provide cash to a wider range of financial firms via tools not used since the Great Depression.
"There is a lot of distrust between banks and also yesterday's Fed rate cut has increased distrust as it shows something really bad is going on," said ING rate strategist Wilson Chin.
Spreads of unsecured dollar and euro rates over secured rates also widened sharply on Monday with the dollar 3-month Libor/Overnight Index Swap spread hitting 73 bps and the euro spread widening to 77 bps.
"It's quite illiquid this morning. If you want unsecured cash you're really going to have to pay up for it. It's really quite an intense situation," said David Keeble, head of rate strategy at Calyon.
Below is a table of dollar, euro and sterling Libor in percentage terms, with the previous session's rates in parentheses.
DOLLAR EURO STERLING O/n 3.86250 (3.05375) 4.05500 (4.04125) 5.58750 (5.31375) 1 wk 2.60250 (2.76000) 4.16000 (4.15063) 5.56625 (5.34625) 2 wk 2.57875 (2.76750) 4.24938 (4.23375) 5.59625 (5.44625) 1 mo 2.55875 (2.77500) 4.33188 (4.31375) 5.71875 (5.70000) 2 mo 2.56500 (2.77063) 4.45625 (4.43625) 5.82125 (5.79750) 3 mo 2.57875 (2.76375) 4.65813 (4.61750) 5.95875 (5.93188)
For RICs to the above rates, go to <0#LIBORSUPERRICS>. (Editing by Ron Askew)