Sept. 12 (Bloomberg) -- The three-month rate banks charge each other for pounds held at the highest in nine years after Bank of England Governor Mervyn King rejected calls to provide money markets with extra longer-term cash to cut borrowing costs.

The London interbank offered rate, or Libor, held at 6.9 percent, keeping the gap between three-month rates and the central bank's key rate, currently 5.75 percent, at the widest in at least two decades, according to the British Bankers' Association. The overnight rate for pounds was also unchanged at 5.9 percent, the BBA said.

Borrowing rates have soared as lenders, concerned that losses on securities linked to U.S. subprime mortgages will spread, remain unwilling to provide funding. At the same time, institutions wary of accessing the asset-backed commercial paper market need cash more than ever.

``Banks and other institutions are clamoring for cash,'' said Stuart Thomson, who helps oversee the equivalent of $46 billion at Resolution Investment Management Ltd. in Glasgow, Scotland. ``These levels are the equivalent of another three base rate hikes. That's going to impact on the wider economy.''

The BOE has been more reluctant than the U.S. Federal Reserve and the European Central Bank to provide emergency funds to banks. While the U.K. central bank will offer extra money this week to cut overnight rates, it has ruled out action to ease three-month borrowing costs.

`Risk-Taking'

``The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior,'' King said today in written testimony to the U.K. Treasury Committee. ``That encourages excessive risk-taking, and sows the seeds of a future financial crisis.''

Three-month Libor for dollars stayed at 5.7 percent, the BBA said today. It climbed to 5.72 percent on Sept. 5, the highest since January 2001. The overnight dollar rate fell 11 basis points to 5.18 percent, its fifth straight decline, as investors raised bets the Fed will cut the benchmark interest rate half a percentage point to 4.75 percent next week.

``Overnight dollar rates are falling because we've seen quite a lot of measures by the Fed in the past two weeks aimed at easing pressures in that area,'' said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh. ``That's clearly been helped by market expectations that the Fed is going to cut rates next week.''

The overnight rate for euros dropped 2 basis points to 4.15 percent, after the ECB yesterday drained a record 60 billion euros ($83 billion) from the money market. The three-month rate declined 1 basis point to 4.74 percent, near an eight-year high, the BBA said.

The ECB, the Fed and other central banks have loaned banks $400 billion over the past month to help lower lending rates. The Fed on Aug. 17 cut the rate at which it loans money directly to banks and dropped its bias toward fighting inflation.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Last Updated: September 12, 2007 08:38 EDT