Traders said banks were paying 1.5-1.6 percent to borrow overnight, compared with Wednesday's settlement at 1.215 percent and -- for the first time since early February -- above European Central Bank's refi rate, now at 1.25 percent.

The Eonia rate has risen from about 0.8 percent at the start of the new reserve period last week, a typical pattern as banks tend to try to meet their requirements in the early part of the period, this one being shortened by a series of public holidays. "We have a very limited excess liquidity in the system and banks are frontloading their reserves. The very long weekend triggered such a rise in short-term rates," said Patrick Jacq, rate strategist at BNP Paribas.

But with demand for ECB cash expected to be high at next week's three-month and one-week liquidity tenders, excess liquidity in the banking system should remain at levels comfortable enough to push Eonia back below the key rate.

Excess liquidity in the money market is currently around 20 billion euros, according to Reuters calculations, sharply down from levels around 100 billion euros late last year. It is expected to rise by 10-15 billion euros after the tenders.

HIGHER DEMAND SEEN FOR ONE-WEEK CASH

Barclays Capital strategist Giuseppe Maraffino says Tuesday's one-week auction could see demand of up to 110 billion euros, compared with 97 billion maturing, while bids for three-month cash on Wednesday could be around the level of 71 billion euros maturing. "At the (one-week tender), demand should be high because it would be more convenient to go to the ECB and borrow at 1.25 percent than borrow in the market where it is much higher," Maraffino said. "A good roll next week is very likely ... so Eonia should go down to maybe 1-1.10 percent."

BNP Paribas's Jacq also expects higher demand for the one-week tender than for the three-month tender, due to expectations of further hikes in ECB's key rate.

"The problem is that when you go for one week (cash) you know the rate from the start. When you go for a three-month tender you don't know the rate as we enter a rate hiking cycle," he said.

Euribor futures rose by up to 5 basis points across the 2011-2012 strip, pushing their implied rates slightly lower. Renewed tensions in the euro zone's lower-rated states due to talk of Greek debt restructuring may have caused the blip, but analysts expect the move to reverse soon.

"It is not the beginning of a re-pricing of the monetary policy tightening, it is just a correction," Maraffino said. "I don't think the ECB will be forced to change its strategy."

London interbank offered rates for three-month euros rose further to 1.31750 percent from 1.30313 percent on Wednesday. Markets are almost fully pricing in three more rate hikes by the end of the year.