Europe's banks borrowed nearly 490 billion euros from the European Central Bank at its first-ever offer of three-year loans on Wednesday, encouraging demand for the euro and stocks on hopes the funding will ease the two-year old debt crisis.
But the very heavy take-up of the ECB money also highlighted the scale of the pressures European banks are under and some of the initial gains in asset prices were quickly given back.
The ECB had indicated the ultra-cheap, long-term loans were designed to boost trust in banks, free up money markets and tempt banks to buy Italian and Spanish debt.
Certainly this will help ease liquidity, as will last month's coordinated central bank action on dollar swaps, but it also highlights the gravity of the situation in the euro zone - so don't expect sustained euro gains, said Richard Driver, currency analyst for Caxton FX.
Traders polled by Reuters just hours before the operation expected the ECB to allot 310 billion euros, up from a forecast of 250 billion euros in a poll on Monday.
The number (489 billion euros) beats the previous record of 442 billion euros (the ECB allotted) in June 2009, said Christian Schulz, senior economist at Berenberg Bank.
It is highly unlikely now that banks in the euro zone will go bust because of liquidity shortage.
The ECB lending added fuel to the rally in European stocks, lifting the key FTSEurofirst 300 <.FTEU3> index of leading shares by around 0.8 percent on the day. Euro zone banks were the top gainers, with Italy's Intesa SanPaolo
The euro was very volatile after the tender result was announced, initially rising sharply then falling to a session low before settling to be about 0.2 percent up at $1.3101. It remains well off an 11-month low seen last week of $1.2945.
German government bond futures edged down although on low volumes as the holiday season approaches.
Italian 10-year bond yields, which had been falling, rose slightly to around 6.7 percent, with sentiment undermined by fresh economic news.
Italy's outlook was hurt by data showing the economy had contracted by 0.2 percent in the third quarter compared to the previous three months due to a slump in domestic demand. The negative GDP number put the country on track for what analysts expect will be a prolonged recession.
We expect this trend to continue in the fourth quarter, when there will be an even sharper contraction, and also in 2012, said Vladimir Pillonca economist at Societe Generale.
ECB in graphics: http:/link.reuters.com/neg32s
British consumer morale hit its lowest in almost three years in December as households' became much more pessimistic on the outlook for the next 12 months, a survey from researchers GfK NOP showed.
Gold, which rose to a one-week high on Wednesday on the encouraging economic data from the United States and Germany, eased back to be little changed at $1,626.89 an ounce.