Lending rates between banks tumbled in Britain and the eurozone yesterday after the Bank of England auctioned funds and the European Central Bank flooded the market with an unprecedented €350 billion (£250 billion) capital injection.

In London, the Bank of England’s addition of £10 billion in three-month lending to the money markets was fully taken up, although analysts said that demand seemed relatively muted. The highest bid was for money at 6.6 per cent, well over the Bank Rate of 5.5 per cent. As this was much higher than the three-month sterling Libor interbank offered rate, which dropped from about 6.43 per cent to 6.39 per cent yesterday, the figure suggested that at least one institution is finding it hard to borrow from other banks even at the going rate.

However, the Bank said the average rate was a more modest 5.95 per cent, with the lowest successful bid at 5.36 per cent. The low figure in part reflects expectations of a cut in rates in the months ahead.

The ECB’s auction of unlimited funds at below market rates met a huge response, with bids from 390 commercial eurozone banks. The ECB distributed €348.6 billion of two-week funds, providing money to any institution that offered at least 4.21 per cent. The offering was bigger than any similar operation since the credit squeeze began in August. The move eased money market strains, with Libor interest rates on two-week euro funds dropping from 4.94 per cent to fix at 4.40 per cent.

Defending the Bank’s strategy in the UK money markets, Mervyn King, its Governor, rejected charges that it had been less effective than the ECB or the US Federal Reserve. This was clear since interbank three-month Libor rates in sterling, dollars and the euro were now “absolutely identical”, he said. But he conceded that “I failed to speak out in August to explain how money markets worked; I wish now I had”.

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