Oct. 30 (Bloomberg) -- The European Central Bank's lending to financial institutions surged to a record as it pumped extra cash into the banking system to ease a funding gridlock.

The Frankfurt-based central bank said its outstanding euro loans to banks rose to 773.7 billion euros ($1.01 trillion) yesterday, the largest amount ever, from 753.1 billion euros a day earlier. The figure does not include the ECB's dollar loans.

Lending between banks ran dry after Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, shattering confidence among lenders and sending borrowing costs to records. Money- market rates in London are falling after governments bailed out banks and policy makers intensified efforts to encourage lending with cash injections. The ECB has also signaled it's ready to follow its emergency interest-rate cut on Oct. 8 with another reduction next week.

``There is a slight thaw in the credit freeze, but it's by no means back to anywhere near normal,'' said Padhraic Garvey, head of investment grade debt strategy at ING Bank NV in Amsterdam. ``Short-term money markets are responding to the liquidity flood from the ECB and the prospect of lower interest rates, but we are not out of the woods on longer-term lending.''

The euro interbank offered rate, or Euribor, that banks charge each other for three-month loans fell 3 basis points to 4.83 percent yesterday, the 14th straight decline, according to the European Banking Federation.

The U.S. Federal Reserve yesterday cut its benchmark rate by half a percentage point to 1 percent and ECB President Jean- Claude Trichet said earlier this week he's likely to reduce borrowing costs at the next policy meeting on Nov. 6. The ECB's key rate is currently 3.75 percent.

In a sign banks remain reluctant to lend to each other, they deposited 215.9 billion euros with the ECB overnight at 3.25 percent. Overnight deposits have exceeded 200 billion euros on 10 of the past 11 days.

The ECB also said that banks yesterday borrowed 14.5 billion euros at the emergency overnight marginal rate of 4.25 percent, down from 20.3 billion euros the previous day.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net.

Last Updated: October 30, 2008 05:48 EDT