Dec. 18 (Bloomberg) -- The European Central Bank loaned a record 348.6 billion euros ($501.5 billion) for two weeks to banks to bring down the cost of money at year-end, almost 170 billion more than the bank had initially estimated was needed.

The rate banks charge each other fell to 4.45 percent from 4.94 percent, the European Banking Federation said today. The reluctance to lend money after the collapse of the U.S. subprime market pushed interbank euro rates for two weeks to the highest level in at least six years earlier this week.

The additional cash ``reflects the extra tightness in the market,'' said Lena Komileva, an economist at Tullett Prebon in London. ``However, it doesn't address the fundamental issues of banks hoarding cash and while the central bank has succeeded in stabilizing the shorter term rates, it makes little impact on the longer term rates.''

Borrowing costs jumped in August as banks, including Bear Stearns Cos. and Merrill Lynch & Co., began to reveal losses on securities linked to U.S. mortgages aimed at people with poor credit histories. Losses from U.S. subprime-mortgage foreclosures will probably reach $300 billion, the Organization for Economic Cooperation and Development predicted on Nov. 22.

The ECB said today its estimates showed that banks needed 180.5 billion euros. Yesterday, it said it would serve all bids at or above 4.21 percent to bring rates close to the bank's benchmark lending rate of 4 percent.

The central bank said 390 banks bid for the two-week loans at a marginal rate of 4.21 percent. Bids ranged from 4 percent to 4.45 percent. Next week's tender, settling on Dec. 28, ``will allow potential further liquidity demands to be satisfied,'' the ECB said on Nov. 30.

`Substantial Recession'

The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a ``substantial recession'' in the U.S., Goldman Sachs Group Inc. forecast on Nov. 16. The ECB first offered extra cash on Aug. 9, when it lent an unprecedented 95 billion euros in emergency funding to banks.

In the U.K., the Bank of England successfully auctioned 10 billion pounds ($20 billion) in three-month money to banks and loaned some of the money at 5.36 percent, below its benchmark of 5.5 percent.

``The global intervention of central banks has reduced the stigma associated with counterparties borrowing from central banks,'' said George Buckley, an economist at Deutsche Bank AG in London. ``In that sense, this auction has clearly been a success.''

`Moral Hazard'

The Bank of England failed to attract bidders for cash at four previous auctions of three-month money in September and October. Funds in those operations were offered at a penalty rate 1 percentage point above the central bank's benchmark.

The cash injection ``raises the moral hazard question for the ECB, whereby banks could start relying on getting cheap cash,'' said Michael Schubert, an economist at Commerzbank AG in Frankfurt.

The ``uncertainty could persist for a considerable period until it becomes clearer how the total valuation and income losses, which could be sizable, facing the euro-area financial system will be spread across individual financial institutions,'' the Frankfurt-based bank said in its December Financial Stability Review published Dec. 12.

Investor confidence in Germany, Europe's largest economy, dropped to the lowest in almost 15 years in December as rising credit costs dimmed the outlook for economic growth.

Policy makers in the U.S., the U.K., the euro region, Switzerland and Canada announced last week their first coordinated action to help financial markets since the Sept. 11, 2001, terrorist attacks.

The U.S. Federal Reserve yesterday conducted the first of four auctions of three-month cash denominated in dollars to banks and financial institutions designed to ease the shortage in lending markets.

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

Last Updated: December 18, 2007 12:05 EST