Bank to offer 5 bln pounds 3-day repo to calm markets

LONDON (Reuters) - The Bank of England will later on Monday offer up 5 billion pounds worth of 3-day loans in an emergency operation to bring soaring overnight interest rates down as a global credit crunch shows no sign of ending.

The central bank said the "exceptional fine-tuning operation" was a direct response to tightening conditions in money markets early on Monday and that like other central bank was keeping a close eye on developments.

"The Bank will take actions to ensure that the overnight rate is close to Bank rate. Along with other central banks, the Bank of England is closely monitoring market conditions," it said in a statement.

This was the second such exceptional fine-tuning operation since the credit crisis began last summer, the Bank said. The first was a 4.4 billion pounds two-day repo offered on September 18.

Market conditions had noticeably worsened on Monday following news that U.S. investment banking giant Bear Stearns had to be sold off at a rock-bottom price and the U.S. Federal Reserve had to make an emergency cut in its discount rate.

Stock markets around the world tanked and interbank lending rates climbed even higher as banks balked at doing business with each other as they fear possible losses on each others' books.

The Euribor rate for three-month unsecured lending in euros between European banks rose to a fresh two-month high of 4.652 percent on Monday from Friday's 4.617 percent.

Traders reported a near stand-still in money markets with banks increasingly wary of lending to each other for anything but the shortest periods.

"Counterparty risk is back in play, every trade is scrutinised," said one trader.