(Reuters) - Euro zone banks will continue to park their cash with the ECB in 2012 rather than lend it as recent cash injections offer little hope of thawing frozen interbank markets.

Most of the euros that banks borrowed from the European Central Bank at a three-year tender last week ended up back with the ECB in the form of deposits, which hit a record high of 452 billion euros this week.

Analysts see deposits at the ECB staying high in 2012.

Banks are waiting for the new year before deciding what to do with the money, but analysts say they are unlikely to lend to other banks or to the real economy as long as the sovereign crisis shows no sign of abating.

They will instead use the money to pay back their debt as bond markets have all but dried up for them. They also have to cover holes left by retail clients moving their savings out of the sector due to fears that sovereigns may take private lenders down with them if the crisis intensifies.

Against that backdrop, the ECB will probably keep flooding the system with liquidity -- it plans another three-year auction in February -- with any funds in excess of the banks' funding needs likely to end up back with the ECB for rainy days.

I expect (banks) to keep the money in deposits ... because they fear they can run short of liquidity and that they cannot face a bond redemption, (while) deposits are shrinking so they need higher liquidity buffers, ING rate strategist Alessandro Giansanti said.

The origin of the problems of banks is the governments. As long as the government risk is still present (interbank stress) will not disappear.

Analysts say the levels of cash banks borrow from and deposit with the ECB will be among the most accurate indicators of money market stress, as short-term interbank rates are likely to remain low given the high excess liquidity.

Benchmark euro bank-to-bank lending rates declined further on Thursday.

Excess euro liquidity stood at 444 billion euros, according to Reuters calculations.

CROSSING THE RUBICON

Even unlimited ECB liquidity may not prevent a deterioration in conditions for banks in 2012.

Banks need collateral to borrow money from the ECB. Although this requirement is quite loose and may be eased further if needed, there is a fear in the market that smaller banks on the euro zone's periphery may eventually run out of eligible collateral, some analysts say.

With ratings agencies threatening to downgrade government debt next year and the possibility other bank-owned assets will lose value as well, banks' collateral may earn them an ever decreasing amount of funds as ECB loans roll over.

The ECB would then have to find other tools if it wished to offer protection to the banking system.

Many economists argue that quantitative easing - a tool which the ECB has said will not use because it goes against its inflation targeting mandate - would be the most effective way to restore confidence in government debt markets and the euro zone banking sector.

It's only when they start printing money that they have passed the Rubicon, said Michael Derks, chief strategist at FXPro. They now need to be very close to that.