Nov. 12 (Bloomberg) -- The cost of borrowing euros in London for three months fell to the lowest level since before the credit squeeze began, and dollar rates slid, as central banks sought to counter a collapse in lending that's battering the global economy.

The London interbank offered rate, or Libor, for euros fell 5 basis points to 4.27 percent today, the lowest level since Aug. 1, 2007, British Bankers' Association data showed. That's 102 basis points above the European Central Bank's key interest rate, compared with 40 basis points more on Aug. 9, 2007, when BNP Paribas SA halted withdrawals on three funds, sparking the crisis. The three-month dollar rate fell for the 23rd consecutive day.

``Central bank cash auctions are really starting to have an impact on money rates,'' said David Keeble, the London-based head of fixed-income strategy at Calyon, the investment-banking unit of France's Credit Agricole SA. ``There's a lot of very cheap cash coming into the system. We're still at elevated levels. The lending side isn't picking up too much.''

Interbank rates fell from last month's peaks as central banks provided unlimited dollar funding and governments offered bailouts and guarantees to financial institutions. Credit markets, which began seizing up after the BNP Paribas decision, froze after Lehman Brothers Holdings Inc. collapsed on Sept. 15, shattering lenders' confidence they would be repaid.

`Not Functioning'

``The money market is still not functioning properly and banks are not willing to lend to each other,'' ECB Executive Board member Lorenzo Bini Smaghi said yesterday. ``The rates that banks charge each other are still too high.''

Three-month dollar Libor slid almost 5 basis points to 2.13 percent, the lowest level since Oct. 27, 2004. That's still 113 basis points more than the Federal Reserve's target rate for overnight bank loans. The average is 16 basis points in the seven years to August 2007.

Banks yesterday lodged 142 billion euros ($178 billion) in the European Central Bank's deposit facility at 3.25 percent, down from 209.5 billion a day earlier. The daily average in the first eight months of the year was 427 million euros. Financial institutions borrowed 7.3 billion euros from the ECB at the emergency overnight marginal rate of 4.25 percent, compared with 11.4 billion euros the day before.

The global credit crisis that started with the collapse of U.S. subprime mortgages caused banks worldwide to record $927 billion in writedowns and losses since the start of last year. That prompted financial institutions to freeze lending and sent corporate borrowing costs to records.

Commercial Paper

U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

``Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,'' Paulson said in a speech today in Washington.

Interest rates on U.S. commercial paper advanced for the first time in three days, with rates on the highest-ranked 30-day CP rising 11 basis points to 0.99 percent, or 1 basis point less than the Fed's target lending rate, according to yields offered by companies and compiled by Bloomberg. On Oct. 9, CP yielded a record 278 basis points more than the target rate.

The three-month rate for Hong Kong dollars, known as Hibor, dropped almost 6 basis points to a five-month low of 2.04 percent today after the city's monetary authority added funds.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the BBA before noon in London.

The Libor-OIS spread, which former Fed Chairman Alan Greenspan said in June should serve as a measure for determining when markets have returned to normal, was at 165 basis points. The spread measures the difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate.

It compares with 87 basis points on the last trading day before Lehman declared bankruptcy, and an average of 11 basis points in the five years before the onset of the financial crisis.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Garfield Reynolds in Sydney at greynolds1@bloomberg.net

Last Updated: November 12, 2008 12:06 EST