* Money funds shift dollars into Canadian bank debt * Investor demand drives down Canadian banks' funding cost * Canadian banks enjoy cheaper funds than euro-zone rivals By Richard Leong NEW YORK, Nov 14 (Reuters) - U.S. money market funds have increased their investments in Canada for safety's sake as the debt turmoil in Europe rages on. The $2.6 trillion money fund industry, which had been a major investor in short-term euro-zone bank debt, sees the world's 10th-biggest economy in better shape than Europe. Canadian banks are deemed safer than their European counterparts, given their minimal exposure to the debt-laden and weaker euro-zone nations, the focal point of that region's crisis, analysts and fund managers said. "Canada is clearly the gold standard. It has emerged as the bullet-proof market," said Joe D'Angelo, head of money markets at Prudential Fixed Income in Newark, New Jersey, who oversees $50 billion in assets. To be sure, this upbeat view could reverse quickly if fund managers see signs that Canadian banks become wobbly if the domestic economy deteriorates, analysts said. U.S. money funds so far this year increased their holdings of Canadian bank debt by $28 billion. This is only a fraction of the $266 billion drop in their ownership of commercial paper, certificates of deposit and other short-term securities from euro-zone banks, according to J.P. Morgan Securities. These funds have also shifted money into Australian, Nordic and Japanese bank securities. Money has also flowed into U.S. Treasury and agency bills, helping to push their yields down to near zero. Amid the scramble for low-risk investments, some market sources said that some Canadian banks have turned down cash from U.S. investors because they don't want to expand their balance sheet too much and take on additional risks. "They are getting a lot of requests from outside Canada. They are finding demand for their paper lining up outside their doors," said Walter Posiewko, senior portfolio manager at RBC Global Asset Management in Toronto, who oversees $10 billion.The flood of cash into Canadian and Australian banks has driven down their costs to borrow dollars, compared with their European banks. "It's working out pretty well for these countries and their banks," said Deborah Cunningham, chief investment officer of money markets at Federated Investors in Pittsburgh, which oversees $355 billion in assets. In the interbank market, the Bank of Nova Scotia and Royal Bank of Canada reported on Monday their borrowing costs for three-month dollars were 0.43500 percent and 0.45000 percent, respectively. They are below the day's fixing at 0.46056 percent. In contrast, most European banks on the panel are borrowing at rates above the fixing. French bank Credit Agricole's fixing was at 0.57500 percent, which was the highest among the 19 bank panel. Canadian banks have also been enjoying lower funding costs than their European rivals in other parts of the money market. They sold short-term commercial paper due in November to money funds at interest rates in the low 20-basis-point range. That was half what French banks paid for comparable borrowing from the funds, according to monthly data from U.S. money funds.