Dollar interbank lending rates paused at record lows on Thursday after a report that Federal Reserve policymakers were divided on when to begin raising interest rates.

One week before the Fed's next policy meeting hedge fund adviser Medley Global Advisors said there was a growing divide among policy makers on how quickly they should begin raising rates.

Analysts said the report reminded the market that central banks could one day remove -- albeit gradually -- the proverbial punch bowl of monetary stimulus once an economic recovery is on solid footing.

Liquidity is starting to flow around but central banks have been instrumental in that and if you can't guarantee their presence then it will end the big collapse in the Libor/OIS spreads that we've seen recently, said Calyon rate strategist David Keeble.

Nonetheless, central banks have sent a consistent message in recent weeks, sounding cautious about the economic outlook and indicating rates could remain lower for longer.

Three-month dollar Libor rates USD3MFSR= paused at record lows of 0.29188 percent, while equivalent euro rates EUR3MFSR= were also little changed at 0.72375 percent For more see [ID:nLH531680].

Three-month borrowing rates for U.S. banks were 0.3175 percent on Thursday versus the previous session's 0.3113 percent, according to ICAP's New York Funding Rate.

A year after Lehman Brothers collapsed, paralyzing the financial world and causing interbank lending rates to rise sharply amid fear of counterparty risk, the lower lending rates reflect the ample liquidity pumped into the system by central banks, rather than any eagerness to lend, analysts say.

Three-month sterling rates GBP3MFSR= shed nearly another basis point to 0.58563 percent after Bank of England Governor Mervyn King said on Tuesday the bank could cut the rate paid on bank reserves to discourage banks from hoarding cash.

The spread between three-month dollar Libor and equivalent Overnight Indexed Swap rates held close to its narrowest since the third quarter of 2007, at 13 basis points, when the global credit crisis began.

The spread, a measure of financial market stress, peaked near 360 basis points after the collapse of Lehman Brothers.

Morgan Stanley said that while risks remained, including how the results of the ECB's next 12-month tender are perceived and how the BoE will manage its exit from quantitative easing, the worst of the financial system crisis was probably over. 

These challenges -- significant though they are -- are of a different scale to the dangers that have faced the world financial system for much of the time since the credit crunch first erupted in the money markets in July 2007, said Morgan Stanley rate strategist Laurence Mutkin.

BANKS PREPARE FOR 12-MONTH ECB TENDER

European markets were focused on the ECB's next offer of 1-year funds at the end of September. At the first offering of such funds in June, banks grabbed 442 billion euros, pushing excess liquidity to more than 200 billion euros.

That has since decreased to around 115 billion euros.

Morgan Stanley calculated that since June's 1-year tender, banks have taken 235 billion euros less from the ECB's open market operations with shorter maturities up to 6 months. The bank said this exceeded a roll-off of 228 billion euros of shorter-term funds ahead of the June tender.

Analysts expect a take-up of around 100 billion euros, with estimates ranging from around 50 billion to 200 billion. (Additional reporting by Kirsten Donovan; Editing by James Dalgleish)