Aug. 9 (Bloomberg) -- The Bank of Canada said it will ``provide liquidity'' to support financial markets after the European Central Bank loaned money to ease a credit crunch that started with the U.S. subprime mortgage collapse.

The central bank will ``support the stability of the Canadian financial system and the continued functioning of financial markets,'' the bank said today from Ottawa in a statement on its Web site, without disclosing a specific course of action.

The benchmark London interbank offered rate for overnight loans between banks in Canadian dollars rose to 4.74 percent today from yesterday's 4.53 percent, mirroring increases in rates for loans in euros and U.S. dollars. The Bank of Canada's target rate for overnight loans between banks is 4.5 percent.

The ECB, in an unprecedented response to a sudden demand for cash from banks, loaned 94.8 billion euros ($129.8 billion) to help prevent a credit shortage.

The Bank of Canada statement said its commitment is part of its ``normal operational duties relating to the stability and efficient function of Canada's financial system.'' Central-bank spokesman Jeremy Harrison said by telephone before the statement was posted that the Bank of Canada is also in contact with other central banks on the issue.

`Heightened' Concern

``While a 'normal' response by the bank, in its own words, the statement does reflect a heightened sense of concern,'' Andrew Pyle, an investment adviser at Scotia McLeod Inc., a division of Scotia Capital, wrote in a e-mail to clients. The subprime problem could spread to higher-quality business and consumer loans and other countries, and may require central banks to cut interest rates, Pyle wrote.

Canada's central bank so far today has made C$1.455 billion ($1.38 billion) of agreements to purchase government securities from dealers and sell them back the next day, according to the central bank.

Those agreements aim to steer market overnight rates down to the central bank's target. The central bank made C$410 million of those purchases on Aug. 7 and C$663 million on Aug. 2.

Canada's dollar declined the most in almost two weeks and its two-year bond gained the most in a month as investors sold risky assets on concerns U.S. mortgage losses will spread, slowing the global economy.

Canada's dollar fell to 94.58 U.S. cents at 12:42 p.m. in Toronto, the biggest decline July 27.

The yield on Canada's benchmark 3.75 percent bond due June 2009 fell 9 basis points to 4.58 percent. The price, which moves inversely to yield, gained 15 cents to C$98.57. Shorter term maturities are most sensitive to rate policy changes.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

Last Updated: August 9, 2007 13:25 EDT