Oct. 28 (Bloomberg) -- Money-market rates in London declined as cash injections by European central banks showed signs of easing the paralysis among lenders.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 4 basis points to 3.47 percent today, its 12th straight drop, according to the British Bankers' Association. The comparable euro rate slid 5 basis points to 4.85 percent, the lowest level since April 28.

``Libor fixings continue to show slow improvements,'' said Laurence Mutkin, the London-based head of European fixed-income strategy for Morgan Stanley. ``There may be renewed improvement in term-financing markets in the coming weeks.''

Credit markets, which began seizing up after BNP Paribas SA halted withdrawals on three funds in August 2007, froze after Lehman Brothers Holdings Inc. collapsed on Sept. 15, prompting governments and central banks worldwide to pledge trillions of dollars to bail out banks and resuscitate lending.

The European Central Bank today lent financial institutions 325.1 billion euros ($408 billion), the most in 10 months. The Bank of England loaned $3 billion of overnight cash today, after allotting the same amount yesterday.

Singapore's three-month rate for U.S. dollars fell 4 basis points to 3.48 percent, its 10th straight decline since reaching 4.8 percent on Oct. 13, the highest level this year. Hong Kong's three-month interbank lending rate, or Hibor, increased 10 basis points to 3.84 percent today, the highest since Oct. 17.

BOE Report

While money-market rates have dropped, central bank efforts to boost liquidity in global markets are failing as lenders continue to hoard cash, according to an index compiled by the Bank of England for its semi-annual financial stability report.

The bank's Financial Market Liquidity Index, which gauges how far a basket of nine indicators have strayed from a mean value, dropped to minus 2.3220 as of Oct. 17. It was as high as 0.928 on March 29, 2007. The indicators include gaps between bid-and-offer prices on stocks, currencies and bonds, the ratio of returns to trading volumes, and spreads in the credit market.

In a further sign some banks remain wary of lending to each other, financial institutions lodged 213.1 billion euros in the ECB's overnight deposit facility yesterday, up from 202.6 billion euros the previous day. The daily average in the first eight months of the year was 427 million euros.

The three-month Libor for dollars remains 197 basis points above the Federal Reserve's target rate for overnight loans of 1.5 percent, up from 81 basis points about three months ago. At the start of the year, the spread was 43 basis points.

Greenspan's Measure

The Libor-OIS spread, a measure of cash scarcity, narrowed 5 basis points to 258 basis points today, down from 345 basis points two weeks ago. It was at 87 points before Lehman filed for bankruptcy protection.

Former Fed Chairman Alan Greenspan said in June the Libor- OIS spread, which is the difference between the three-month London interbank rate for dollars and the overnight indexed swap rate, should serve as a measure for telling when markets have returned to normal.

Overnight indexed swaps are a gauge of expectations for central bank rates. The Fed uses the one-month OIS rate to set the minimum bid level when it lends cash to banks through its Term Auction Facility. Overnight indexed swaps are over-the- counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central- bank rate over the life of the swap.

The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, narrowed 14 basis points to 262 basis points today, compared with 436 basis points two weeks ago.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the British Bankers' Association by 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.

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

Last Updated: October 28, 2008 09:48 EDT