* Euro o/night rates up as ECB reserve period ends
* Central Bank drains prepares to drain overnight cash

* Tenders to point to rate path for next few weeks

By Kirsten Donovan

LONDON, Nov 10 (Reuters) - Benchmark euro interbank lending
rates edged lower on Tuesday but overnight rates jumped as the
European Central Bank drained liquidity at the end of the
reserve maintenance period.

The ECB opened an operation to drain overnight funds from
the money market [ID:nWEA0112], as it usually does at the end of
each monthly maintenance period.

The anticipated cash drain saw overnight Libor rates
EURONFSR= rise more than 30 basis points to nearly 61 basis
points and will see the overnight rate fixing EONIA=, which
last week hit a record low around 0.32 percent, spike higher.

But whereas the rate usually quickly returns to its prior
levels, analysts said it may remain moderately elevated over
coming weeks given that there is 34 billion euros of 3- and
6-month open market operations maturing this week.

Apart from excess cash in the banking system possibly
declining after these operations, banks may take the opportunity
to position themselves for participation in the ECB's next, and
possibly final tender, of 1-year money in December.

"We would pay close attention not only to the net
allocations but especially to the degree to which banks use this
opportunity to roll over the 34 billion euros from the
longer-term operations to the shorter-term ones to make room for
the one-year tender," said Commerzbank rate strategist Benjamin
Schroeder.
A further near 30 billion euros of 3- and 6-month money also
matures before the December 1-year tender.

Barclays Capital strategist Huw Worthington thinks Eonia
could hover around the mid 40 basis points over coming weeks,
compared with 33 basis points on Monday.
"We might well have Eonia fixing at on average 45 basis
points until the end of November. This would definitely start to
worry investors, and push fixings higher," he said.

Traded overnight rates were quoted around 60 basis points.
Banks on Tuesday took 51.25 billion euros of 1-week funds, a
small increase from the 46.2 billion euros maturing and rolled
2.5 billion euros of 7.7 billion euros of maturing 28-day money.

Benchmark three-month rates EUR3MFSR= edged down to
0.67250 percent [ID:nLA636088].

ECB CASH STARTING TO LOOK EXPENSIVE

Overnight deposits at the ECB rose to over 150 billion euros
as banks juggled their finances as the end of the maintenance
period. [ID:nFAT006886]

Calyon rate strategist David Keeble estimates the ECB is
making a profit of around 2 million euros a day from banks
putting the excess funds they have borrowed at 1 percent back on
deposit at just 0.25 percent.

However, with euro Libor rates now below 1 percent for
maturities out to 6-months, taking the ECB's handouts is
becoming the expensive option.

As a result, traders say interbank lending conditions have
improved in recent weeks although much trading still remains
name specific.

"As the banking system heals itself and the shortage of
capital becomes less intense then we can expect that the system
as a whole would find ways to reduce the ... profit being given
to the ECB," said Calyon's Keeble.

Elsewhere, three month dollar Libor USD3MFSR= held at
record lows of 0.27250 percent.

The U.S. Federal Reserve said on Monday demand fell for most
types of U.S. bank loans over the past three months, while the
percentage of banks tightening lending standards declined from
peaks reached last year [ID:nN09263588].

Separately, it said nine of 10 large U.S. banks ordered to
raise capital in May have met or exceeded their goals and the
laggard -- auto lender GMAC Financial Services -- is negotiating
for a fresh infusion of taxpayer funds. [ID:nN09272401]