Oct. 24 (Bloomberg) -- The cost of borrowing in dollars overnight in London rose as the increased likelihood of a global recession spurred banks to hoard cash even after policy makers pumped record amounts of the U.S. currency into financial markets.

The London interbank offered rate, or Libor, that banks charge for such loans climbed 7 basis points to 1.28 percent today, British Bankers' Association said. It gained for the first time in 10 days yesterday. The comparable rate for U.K. pounds jumped 19 basis points to 4.75 percent. The Libor-OIS spread, a measure of cash scarcity, widened by the most since Oct. 10.

``The level of activity in the money markets remains significantly below standard norms and subject to sporadic abnormalities that can only be a function of illiquidity,'' said Charles Diebel, head of European rates strategy at Nomura International Plc in London.

The thaw in lending that began earlier this month after policy makers pumped cash into money markets and governments bailed out banks may be faltering as the global economy slides into a recession. Credit markets froze after the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15 as financial institutions hoarded cash on concern more banks would fail.

Stocks plunged around the world, sending the Dow Jones Stoxx 600 Index down 4.8 percent to the lowest level in five years. The U.K. pound fell the most in at least 37 years against the dollar after the British economy contracted more than forecast in the third quarter. The yen surged to a 13-year high versus the U.S. currency, while the yield on 30-year Treasuries fell to the lowest level in more than three decades.

Commercial Paper

U.S. companies' short-term interest costs rose today, with the rates on the highest-ranked 30-day commercial paper climbing 12 basis points to 2.63 percent, according to yields offered by companies and compiled by Bloomberg. Commercial paper, which typically matures in 270 days or less, is used by companies to finance payroll, rent and other daily expenses.

The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, widened 9 basis points to 263 basis points today. It was at 330 a week ago. A basis point is 0.01 percentage point.

The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was at 270 basis points, up from 257 basis points yesterday. It was at 112 basis points two months ago.

ECB Lending

The Treasury began purchasing stakes in a number of regional U.S. banks, as the government stepped up efforts to halt the credit freeze. PNC Financial Services Group Inc. said it is using Treasury funds to acquire National City Corp. for about $5.2 billion in stock. The capital injection is the first in phase two of a $250 billion program for financial companies, a person familiar with the matter said. An initial $125 billion was allocated to nine of the largest U.S. banks.

The European Central Bank said Oct. 21 its lending to banks reached a record 773.2 billion euros ($979 billion) through monetary operations, up from 739.4 billion euros a week earlier and a 68 percent surge from the first week of September.

Policy makers in Europe and Japan have been offering banks an unlimited supply of dollar funding.

Libor is set by a panel of banks in a daily survey by the British Bankers' Association at about noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms ranging from one day to a year. About $360 trillion of financial products worldwide, from mortgages to company loans and derivatives, is tied to the Libor.

The three-month lending rate for Hong Kong dollars, known as Hibor, rose for the second day, gaining 5 basis points to 3.29 percent. Australian three-month interbank borrowing costs rose 3 basis points to 5.89 percent, the highest since Oct. 15.

South Korea's benchmark 91-day certificate of deposit rate rose 1 basis point to 6.17 percent, the highest since January 2001. Indonesian three-month interbank rates climbed 4 basis points to 12.25 percent, 275 basis points above the central bank's main benchmark. That's the largest premium in three years.

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

Last Updated: October 24, 2008 13:20 EDT