(Reuters) - Europe's banks borrowed nearly €490 billion or $637 billion from the European Central Bank (ECB) 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.

On Wednesday at mid-day, London's FTSE 100 was down 25 points to 5,393, Germany's DAX was down 29 points to 5,819, and France's CAC 40 was off 22 points to 3,033.

Wall Street looked set to open higher, but the very heavy take-up of the ECB money also highlighted the scale of the pressures European banks are under. So some of the initial gains in asset prices in Europe 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 a liquidity shortage.

MARKETS RALLY LIMITED

The euro hit the day's low against the dollar on Wednesday $1.3072, reversing an earlier rise of nearly one percent to the day's of $1.3199 immediately after the tender's outcome became known. It remains well off an 11-month low seen last week of $1.2945.

The ECB loans did add some fuel to the rally in European stocks, lifting the key FTSEurofirst 300 index of leading shares by around 0.8 percent on the day. Euro zone banks were the top gainers, with Italy's Intesa SanPaolo up 4.2 percent and France's BNP Paribas up 3 percent.

U.S. stock index futures still pointed to a higher open on Wall Street with the focus on Oracle Corp, which posted after the bell earnings on Tuesday that fell short of Wall Street's forecasts for the first time in a decade.

Italian and Spanish government bond yields snapped an eight-session falling trend after the tender results, with market players booking profits as doubts crept in about whether the cash would be used to buy peripheral bonds.

Italian bond yields were 29 basis points higher at 6.92 percent, with Spanish yields 10 bps higher at 5.23 percent, after both had fallen almost 100 basis points in the last week and a half.

German government bonds and U.S. Treasuries were little changed in thin market conditions.

The U.S. Treasury Department will sell $29 billion in seven-year notes at 1800 GMT. It saw firm demand at its $35 billion sale of new five-year notes on Tuesday, the second-last coupon auction of the year.

ECONOMIC DATA CLOUDS

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.

The gloomier economic outlook also spread to the UK, where 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 $1,623.60 an ounce.

Brent crude oil prices rose to around $107 a barrel after posting the biggest one-day percentage rise since mid-October on Tuesday to settle up by $3.09.

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