Dec. 19 (Bloomberg) -- Short-term borrowing rates fell in Europe, the U.S. and U.K. as European Central Bank council member Klaus Liebscher said the bank is ready to provide more cash to restore confidence in money markets.

The three-month euro interbank offered rate, or Euribor, dropped 7 basis points to 4.81 percent, the lowest since Nov. 30, the European Banking Federation said today. The three-month rate for pounds declined 18 basis points to 6.21 percent, the lowest in four months, the British Bankers' Association said.

Borrowing costs have soared following the collapse of the U.S. subprime-mortgage market, with the three-month euro rate climbing to a seven-year high of 4.95 percent last week, from 4.26 percent on July 31. The European Central Bank, which injected a record $500 billion worth of euros into the banking system yesterday, ``stands ready to act'' again, Liebscher said today. ECB President Jean-Claude Trichet said the coming weeks may be ``challenging'' for financial markets.

They ``absolutely flooded the market with cash and that's brought rates right back down,'' said Orlando Green, a London- based fixed-income strategist at Calyon, the investment-banking arm of Credit Agricole SA, France's second-biggest bank. ``They've achieved their stated goal of providing enough funds to cash-hungry banks to tide them over the year-end.''

In the largest coordinated action since the Sept. 11, 2001, terrorist attacks, central banks in the U.S., U.K., Canada, Switzerland and the euro region are seeking to revive interbank lending to prevent the soaring cost of short-term credit from undermining economic growth.

Morgan Stanley

Financial institutions have reported losses of more than $70 billion on securities linked to U.S. subprime mortgages this year. Morgan Stanley announced a steeper-than-forecast $3.56 billion fourth-quarter loss today after $9.4 billion of writedowns on mortgage-related holdings.

The Federal Reserve said today it lent $20 billion in emergency one-month funds on Dec. 17 at a rate of 4.65 percent in the first of four auctions. Ninety-three financial institutions submitted $61.553 billion in bids, resulting in a bid-to-cover ratio of 3.08, the central bank said in a statement. The Fed will auction as much as $20 billion tomorrow.

The ECB loaned an unprecedented 348.6 billion euros ($501.1 billion) of two-week cash yesterday, almost 170 billion euros more than it estimated was needed. The Bank of England also held the first of two special auctions yesterday, offering three- month loans in pounds.

Rates Tumbling

The one-month euro rate fell 7 basis points to 4.56 percent, its fifth consecutive decline, the EBF said today. That's still 56 basis points more than the ECB's benchmark rate. The two-week rate, which tumbled a record 50 basis points yesterday, rose 9 basis points to 4.54 percent. The ECB said today it will drain almost 134 billion euros ($192 billion) from the euro-region money market.

``The financial crisis isn't over,'' said Giuseppe Maraffino, a fixed-income strategist at UniCredit Global Research in Milan. ``We need to see how much banks want to borrow and if money market rates fall.''

Treasury notes advanced and stocks in Europe and the U.S. fell. The TED spread, or difference between what the U.S. government and banks pay for three-month loans, widened 11 basis points to 200 basis points, up from 35 basis points at the start of the year.

The S&P 500 Index dropped 0.2 percent and the Dow Jones Stoxx 600 Index declined 0.5 percent.

Futures Decline

Implied yields on Euribor futures contracts fell from near a four-month high, with the June 2008 contract losing 3 basis points to 4.45 percent. The implied yield on the March 2008 contract dropped 1 basis point to 4.52 percent. A basis point is 0.01 percentage point.

The ECB first offered extra cash on Aug. 9, when it lent 95 billion euros of emergency funds. Banks also borrowed about 2.4 billion euros at 5 percent on Dec. 17, the most since Sept. 26, the ECB said yesterday.

Trichet told the European Parliament's economic and monetary affairs committee in Brussels today that policy makers were responding to complaints from banks that they faced limited liquidity over the end-of-year period, when lending activity is subdued and they are trying to prepare their balance sheets.

``Given the uncertainties, the adjustment process in the financial system in the coming period may be challenging and we have to be prepared to the materialization of risks at any time,'' he said.

The bank's attempts to ease financial-market volatility and deliver price stability would remain separate, Trichet said. ``These two responsibilities are clearly distinct and should not be mixed.''

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

Last Updated: December 19, 2007 11:58 EST