Banks will guzzle another half a trillion euros of cheap three-year loans offered by the European Central Bank on Wednesday, according to a Reuters poll of money market traders, who said the opportunity would be the last of its kind.

The poll of 30 euro money market traders on Monday showed they expect the ECB to allot 500 billion euros (422 billion pounds) at this week's longer term refinancing operation (LTRO), with forecasts ranging from 200 billion to 750 billion euros.

Credited with easing state borrowing costs for Italy and Spain, the initial December allotment of 489 billion euros of three-year loans also helped avert a euro zone credit crunch in January, money supply data suggested on Monday.

But worries have arisen about the impact of too much cheap money within the system, and ECB Governing Council member Ewald Nowotny said on Friday the bank should gauge the impact of the double-dose of ultra-cheap funding before taking any more steps.

Traders were also clear that Wednesday would be the last chance for banks to grab cheap loans from the ECB with such long maturities.

Banks are all looking to buy time, said a money market trader.

There is still too much liquidity in the system, but it is (of) a long tenure and it might be the case that some of the big names are looking for the long-tenure cash.

The consensus for this week's second three-year tender has risen sharply from 263 billion euros in a poll on January 16. But it has hovered around 500 billion in the last three polls and is also in line with a Reuters survey of 63 economists last week.

Since the first LTRO, held in December, borrowing costs have fallen in Italy and Spain, which both moved into the spotlight of the debt crisis last year, while parts of the interbank lending market have reopened and stock markets have rallied.

In anticipation of Wednesday's operation, euro-priced bank-to-bank lending rates fell below the European Central Bank's benchmark lending rate of 1 percent on Monday.

The excess liquidity in the system has pushed bank-to-bank lending rates down by a third since December, effectively making the ECB's money less attractive than it was at the time of the first 3-year injection.

Euribor futures showed markets expect rates to bottom out at 0.75 percent in September - still above the low of 0.634 percent they hit in early 2010.

AGGRESSIVE BUYS

If banks used the first LTRO to plug their funding needs and fend off a credit crunch, ECB officials are hoping they will use the second round more aggressively to buy higher-yielding bonds, especially from Italy, which Europe can ill afford to bail out.

Data on Monday showed the monthly rise in the value of Italian banks' government debt holdings was 20.6 billion euros month, a record monthly increase, to 280 billion euros.

Italy's six-month borrowing costs sank towards 1 percent at auction on Monday as it sold 12.25 billion euros in short-term bills, meeting solid demand ahead of the latest ECB cash offer.

I suspect this is market positioning in anticipation of a relatively significant LTRO take-up, the proceeds of which will then be parked in the front end of the Italian curve, said Rabobank strategist Richard McGuire.

Anecdotal evidence suggests banks in Spain used the first LTRO to make most use of this Sarkozy trade - a term adopted by markets after French President Nicolas Sarkozy suggested governments look to banks that tapped the ECB operation to buy their bonds.

Italy faces a debt issuance hump in the next few months and could do with the second LTRO fuelling demand for its debt. It needs to sell around 45 billion euros of its bonds a month in both March and April versus 19 billion in February.

Such use of the LTROs has been met with some controversy in northern euro zone states, particularly Germany.

The LTRO is in principal nothing less than a bailout for southern European states, Commerzbank CEO Martin Blessing said last week.

The ECB has encouraged more banks to participate in Wednesday's operation by relaxing the rules on eligible collateral and verbally assuring banks of the absence of any stigma associated in borrowing from the central bank.

We expect additional demand from some countries due to the extension of collateral requirements and also because it is considered by almost everyone as the last opportunity to get three-year liquidity, said another euro money market trader.

ECB President Mario Draghi also urged banks on Sunday to lend the money borrowed at this week's tender to households and businesses and aid economic growth in the 17-member common currency bloc.

An overwhelming majority, 26 of 29 traders, said the ECB is not likely to conduct any more liquidity operations with a three-year tenure as the effects of the tenders take time to seep into the system.

In the regular weekly poll, traders expect the ECB to lend 125 billion euros at its seven-day operation this week, much lower than the 166.5 billion euros it lent last week, as banks save collateral ammunition for the three-year tender.

(Additional reporting by Paul Carrel and Eva Kuehnen in Frankfurt, Yati Himatsingka in Bangalore; Editing by Hugh Lawson)