By Naomi Tajitsu

LONDON, March 17 (Reuters) - The cost for banks to borrow dollars, euros and sterling slipped on Tuesday as signs that the global banking sector is starting to recover helped to ease some tensions in the money market.

Data from the British Bankers' Association showed that the interbank rate for borrowing euros over three months fell to a euro lifetime low, while the rate for sterling fell to its lowest on Reuters charts dating back 1986.

London interbank offered rates for dollars over three months also trudged lower, with analysts saying that sentiment in the money market was gradually improving, although conditions remained tight.

"The Armageddon scenario that had been passed around last week has now been pushed to the sidelines," said Christoph Rieger, short-end rates strategist at Dresdner Kleinwort in Frankfurt.

He added that a recent flow of encouraging news on the banking sector, including UK bank Barclay's announcement on Monday that its businesses were off to a good start this year, was helping to improve the outlook for the financial system.

Market participants also said that money market tensions may continue to loosen up as governments conduct more intervention to clean up bad assets from the market.

U.S. Treasury Secretary Timothy Geithner has said that his government will move quickly to establish details for financing bad asset sales.

The Federal Reserve begins a two-day policy meeting on Tuesday, and is expected to discuss how to use non-traditional monetary policy to increase market liquidity, after already cutting rates essentially to zero.

Three-month dollar Libor rates were fixed at 1.29938 percent, edging down from 1.30875 percent on Monday and touching its lowest level in more than a week.

For a table of Libor fixings, click on

Rates for three-month euros fell to 1.61188 percent, its lowest since the euro was launched in 1999. Rates for the single currency fell further from 1.62500 percent the previous day.

Euro Libor rates fell after Euribor rates for the single currency fell to a lifetime low on Tuesday.

Sterling rates were fixed at 1.81188 percent.

The three-month Libor/OIS spread for dollars narrowed a touch to 107 basis points from 108 basis points on Monday.

For euros, the spread edged out to 92 basis points from 91 basis points, but it stayed close to around 88 basis points hit in early February, its narrowest since late September.

Three-month sterling Libor/OIS spreads were unchanged at 140 basis points, staying around its narrowest point in a month.

Sterling Libor/OIS spreads have been pinched drastically after the Bank of England announced it would start buying long-dated UK Gilts from the market as part of its quantitative easing measures.

Euribor rates hit fresh record lows

Bank overnight deposits at ECB inch down

Dlr costs, Asia offshore yields suggest calm

(Reporting by Naomi Tajitsu, editing by Andy Bruce) Keywords: MARKETS MONEY/ (naomi.tajitsu@reuters.com; +44 207 542 5830; Reuters Messaging: naomi.tajitsu.reuters.com@reuters.net)

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