Bank-to-bank lending rates have dropped by more than a third over the last few months as a result of the 1 trillion euros the ECB has flushed into the financial markets and are now homing in on the record lows they hit in early 2010.

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, fell to 0.894 percent from 0.902 percent, the lowest level since September 2010.

Rates in other maturities also dropped. Six-month rates fell to 1.203 percent from 1.213 percent and 1onger-term 12-month rates dropped to 1.535 percent from 1.544 percent.

The ECB's two 3-year cash injections in December and February have pushed excess liquidity in the money market to record levels and stand at about 790 billion euros, according to Reuters calculations.

Shorter-term one-week rates, the most heavily influenced by the level of cash in the system, ticked down to 0.318 percent from 0.319 percent, while overnight rates bucked the trend rising to 0.359 percent from 0.355 percent.

The 3-month lending rates have already dropped by over a third since the ECB announced plans to lend banks three-year money back in December, but are still well above the low of 0.634 percent they hit in early 2010.

The market believes that rates may fall close to those levels in the coming months. Euribor futures showed markets were anticipating 3-month rates to fall to 0.69 percent by June, with a further drop to 0.655 percent by September.

ECB President Mario Draghi said after the central bank's monthly meeting on Thursday that the operations had been "an unquestionable success", improving the risk environment and reopening debt markets as well as the inter-bank market, although limited still to short term and national boundaries.

But he left little doubt that unless there was a relapse in the debt crisis, the bank had now done all it planned to in terms of extraordinary measures and that governments and banks needed to take up the baton.

The cash has already calmed euro zone bond markets, such as Spain and Italy and money market experts reported some banks are now prepared to lend to some of their peers for as long as three months, a marked improvement on last month when even month-long loans were hard to come by in the open market.

The enormous amounts of excess cash in the money market is keeping short-term market rates well below the ECB's main 1 percent policy rate. Instead the bank's 0.25 percent overnight deposit rate is acting as a floor for market rates.

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For graphic of EONIA trading volumes click:

here

For a package of graphics on the ECB, click on:

link.reuters.com/nyd85s

link.reuters.com/neg32s

For graphic of euro zone liquidity levels click:

link.reuters.com/qeq25s

For graphic of ECB government bond buying:

link.reuters.com/nak93s

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Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 1000 GMT.

(Reporting Frankfurt newsroom)

• A Permanent Economic Emergency