* Funds will likely try to resist marking shares to market
* No direct impact on short-term rates seen after report
* Euro rates extend rise as liquidity conditions tighten (Changes lead, adds quote, U.S. rates, changes byline, dateline, previous LONDON)
By Emily Flitter
NEW YORK, Oct 22 (Reuters) - A proposal from U.S. financial regulators for new ways to regulate money funds will likely rekindle controversy in the industry since it contains suggestions that have been vigorously opposed by a major trade group, analysts said on Friday.
While analysts said there wouldn't be immediate changes visible in the marketplace, the report, issued on Thursday by the President's Working Group on Financial Markets, a consortium of regulators, seemed to revive the possibility for a longer-term shift in the shape of the industry.
"I don't think this is necessarily a negative or positive thing that investors should react to right now," said Alex Roever, head of short-term fixed income strategy at JPMorgan Securities in New York.
"What it does is take some of these issues that are still pretty controversial in the industry and it keeps them alive and it keeps the discussion going," he said. "At some point down the line we might see some of these proposals coming to fruition."
Money funds are likely to fight hard against the idea of adopting a floating net asset value for their shares.
Currently, most money market shares carry a fixed value of $1. If the value of shares falls below that mark, investors looking for risk-free places to put their cash tend to try to quickly pull out before losing money.
A floating net asset value, in which shares would be marked to market constantly, would remove this psychological trigger. But the Investment Company Institute, the funds' main lobbying group in Washington, has vigorously opposed a floating net asset value in the past.
The ICI has also fought against other elements that appeared in the report, including the proposal to classify funds in two different categories: institutional and retail.
The Securities and Exchange Commission is planning to open a public comment period to seek reactions to the report.
Other areas of the U.S. short-term rates markets remained calm on Friday.
Banks set the three-month dollar London interbank offered rate at 0.28844 percent USD3MFSR= for Friday, unchanged from the previous two days. The equivalent rate for 3-month euros rose to 0.96875 percent versus 0.96250 percent EUR3MFSR=. For latest Libor fixings see [ID:nEAP000023].
In Europe, benchmark interbank lending rates extended their climb with analysts expecting them to grind higher still in coming weeks as excess liquidity in money markets dwindles.
The three-month Euribor rate EURIBOR3MD= -- traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending -- rose to a 15-month high of 1.029 percent, up from 1.025 percent.
The overnight EONIA rate EONIA= rose to 0.862 percent, four basis points higher than a month ago. It is edging close to its June 2009 high of 0.878 percent, which it repeated on Sept. 30, 2010 after banks slashed their consumption of ECB funding in a string of key lending operations.
The rise in EONIA and other short-term money market rates pushed two-year German bond yields DE2YT=TWEB above 1.0 percent on Thursday -- the first time they have done so since late March -- as liquidity conditions tighten.
Strategists said the path for EONIA would be determined by how much of expiring 3-month loans banks choose to roll over into an ECB tender next Wednesday.
In a further sign of the healing process in euro zone money markets, commercial banks hoarded the lowest amount of cash at the ECB's overnight vaults. Banks deposited just over 21 billion euros overnight, the lowest since Nov. 10, 2009. [ID:nECB001225] (Additional reporting by Emelia Sithole-Matarise in London; Editing by James Dalgleish)