In response to intensifying euro zone troubles, the European Central Bank last week reinstated some of its most potent crisis-fighting tools, including 1-year liquidity injections.

The moves are expected to keep euro money market heavily oversupplied with liquidity for the foreseeable future and thereby maintain downward pressure on interbank lending rates.

Banking sector tensions, spiked by the rescue of Franco-Belgian lender Dexia SA this week and fears Greece's debt problems may spark a new wave of losses for banks, continue to outweigh the new support, however.

Three-month Euribor rates , traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, rose to 1.571 percent from 1.570 percent.

Money markets are already well overstocked with ECB funding. Excess market liquidity topped 213 billion euros at the end of the ECB's last reserves period on Tuesday, according to Reuters calculations, the highest level since the end of June last year.

At the same time, and underscoring the nervousness that has paralysed the interbank market, banks also parked 270 billion euros at the ECB, while emergency borrowing from the ECB has remained elevated over the last week.

Six-month Euribor rates also rose, climbing to 1.774 percent from 1.771 percent, while 12-month rates increased to 2.109 percent from 2.106 percent.

Shorter-term one-week rates, normally the most heavily influenced by excess liquidity, bucked the trend, dropping to 1.186 from 1.191 percent.

The start of the new ECB reserves period on Wednesday saw overnight rates jump to 1.220 percent from 0.092 percent, a pattern that usually happens at this point in the cycle.

Banking sector and sovereign debt worries continue to weigh heavily on the euro zone. Europe's banks are expecting to be told to raise more capital in the wake of state rescue of Dexia earlier this week.

Uncertainty created by the debt crisis engulfing much of southern Europe has increased banks' reluctance to lend to each other and prompted many banks to stock up on ECB euro funding.

At the ECB's latest offering of weekly loans, 166 banks took 205 a total of billion euros, up from just under 200 billion last week. Some 59 billion euros was also taken in a separate handout of 1-month loans, up from 54 billion last month.

The deepening crisis has forced the ECB back into emergency mode. It is set to reintroduce ultra-long 1-year funding, plus one of 13-months and has also extended limit-free funding in all its lending operations until the middle of next year.

The central bank is also buying sovereign bonds again, including the debt of Italy and Spain. The next update on its purchases is due on Monday at 1330 GMT.

Copyright Reuters, 2011