LONDON - LENDING rates between banks in the US and Europe continued to fall on Thursday, evidence that credit markets are thawing gradually as central banks pumped more liquidity into the financial system and relaxed rules for banks to obtain credit.

The interbank lending rate for three-month euro loans, known as the Euro Interbank Offered Rate, or Euribor, fell 0.08 percentage points to 5.09 per cent on Thursday. The equivalent US rate also dropped, by 0.05 points to 4.50 per cent.

The improvements in the rates, which dictate the cost of loans in much of the wider economy, came after both the European Central Bank and the Bank of England loosened their requirements for banks to take out loans with them.

The ECB announced on Wednesday that it would accept certificates of deposit (CDs) and lower-rated credit assets.

The BoE Thursday said that from Monday it will have new borrowing facilities for banks, especially tailored for lenders in distress. The penalties banks would pay for using an emergency BoE loan would be cut significantly.

The news came on top of the daily provision of short-term liquidity to the banking sector that several major central banks hold every day as well as special dollar-denominated loans they have started to make through swaps with the Federal Reserve.

But while the fall in interbank rates - for the fourth consecutive day this week - suggests the clogged credit markets are finally clearing up, the improvements remain small.

The interbank rates are in fact still far above their benchmark rates, 3.75 per cent in the euro zone and 1.50 per cent in the US.

Analysts believe this may be because there are still many investments that banks and hedge funds need to unwind in order to raise cash, and because the prospect of a global economic downturn increases the chances of more loan losses.

'Even if central banks are able to ease pressures in financial markets, investors are less convinced about the future of non-financial corporations,' said Ms Kim Forkes at Moody's Economy.com.

She noted that rating reviews for Western European issuers of debt have spiked in the third quarter, which will keep credit conditions under some pressure despite central banks' best efforts. -- AP