The European Central Bank injected an unprecedented $500 billion into the banking system on Tuesday 18 December as part of a global effort to ease the credit market. The Bank of England also flooded money markets with funds, warning of a possible ''self-reinforcing'' downward spiral in credit.

The amount banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45 per cent, the European Banking Federation said. The rate had soared 83 basis points in the past two weeks as banks hoarded cash in anticipation of a squeeze on credit through the year-end.

It is the first sign that policy makers' moves to revive interbank lending are succeeding. The Federal Reserve last week announced the biggest coordinated central bank action since the 9/11 attacks in 2001. More than $70 billion in losses on securities linked to the US subprime-mortgages have made banks reluctant to lend to each other.

The Bank of England charged a minimum bid rate of 5.36 per cent for its offer of £10 billion of 3-month money, as part of a coordinated action with other central banks to ease market tensions by offering cash at favourable rates.

The ECB loaned a record €348.6 billion ($501.5 billion) for two weeks at 4.21 per cent on Tuesday, almost €170 billion more than it estimated was needed. Bids were received from 390 banks, ranging from 4 per cent to 4.45 per cent.

The central bank first offered extra cash on 9 August, when it lent €95 billion of emergency funds. Banks also borrowed about €2.4 billion at 5 per cent on Monday, the most since 26 September, the ECB said. The three-month euro-borrowing rate fell 7 basis points to 4.88 per cent, down from near a seven-year high.

Central banks in the United States, Britain, Canada, Switzerland and the euro region are responding to sub-prime mortgage-related losses at financial institutions including mega-banks like Citigroup, Merrill Lynch and Bank of America.

Only when uncertainty about where and how deep the exposure actually is gets resolved, are commercial banks likely to lend money freely to each other again on the interbank market, which oils the global economy's wheels.