The European Central Bank will lend euro-area banks a recordamount for three years in its latest attempt to keep credit flowingto the economy during the sovereign debt crisis.

The Frankfurt-based ECB awarded 489 billion euros ($645 billion)in 1,134-day loans today, the most ever in a single operation andmore than economists' median estimate of 293 billion euros in aBloomberg News survey. The ECB said 523 banks asked for the funds,which will be lent at the average of its benchmark interest rate —currently 1 percent — over the period of the loans. They starttomorrow.

“It was obviously an offer the banks could not refuse,” saidLaurent Fransolet, head of fixed-income strategy at BarclaysCapital in London. “It shows the ECB is not out of ammunition andit gives banks security on liquidity for a few years. On the otherhand it means banks will rely on the ECB for longer.”

Europe's debt crisis has increased the risk of government andbank defaults, making institutions wary of lending to each otherand driving up the cost of credit. The ECB is trying to ensure thatbanks have access to cheap cash for the medium term so that theycan keep lending to companies and households. In addition to thelonger-term loans, the ECB has widened the pool of collateral bankscan use to secure the funds.

Barclays estimates today's operation will inject 193 billioneuros of new money into the system, with 296 billion eurosaccounted for by maturing loans. The ECB also lent banks $33billion for 14 days in a regular dollar offering, up from $5.1billion a week ago, and 29.7 billion euros for 98 days.

The euro jumped half a cent to $1.3198 before retreating to$1.3092 at 1:25 p.m. in Frankfurt.

“More important than the size of the operation is what banks dowith this cash,” said Simon Smith, chief economist atforeign-exchange broker FXPro Group Ltd. in London. “The dichotomybetween size and use explains why the euro struggled to maintainits initial positive reaction to the news.”

Spanish two-year notes extended a decline, snapping an eight-daygain and sending yields 14 basis points higher to 3.49 percent.Italian notes also dropped, pushing the yield 29 basis pointshigher to 5.27 percent.

'Through the Backdoor'

Yields on government bonds in Italy and Spain fell in the daysafter the ECB announced the loans on Dec. 8 as banks bought thesecurities to use them as collateral in today's tender. FrenchPresident Nicolas Sarkozy has suggested banks could use the loansto buy even more government debt.

Simon Derrick, chief currency strategist at Bank of New YorkMellon Corp, said the loans amount to quantitative easing “throughthe backdoor.”

“What the ECB is doing is providing ultra-cheap money to banks,which in turn are going to be in there buying the sovereign debtup,” Derrick told Linzie Janis on Bloomberg Television's “FirstLook” earlier today. “That's good news in the sense that it'sclearly going to help sovereigns in the near future, but it's alsoprinting more money. That's going to start to weigh on the euroover time.”

Martin van Vliet, an economist at ING Group in Amsterdam, saidbanks are more likely to use the loans to “finance credit to theprivate sector or to repay maturing bank debt.”

“We doubt whether the money will be used extensively to fundpurchases of peripheral debt,” he said.

ECB Vice President Vitor Constancio in a Dec. 19 interviewpredicted “significant” demand for the loans as banks face “veryhigh refinancing needs early next year.”

Some 230 billion euros of bank bonds mature in the first quarterof 2012 alone, ECB President Mario Draghi told the EuropeanParliament this week.

“Banks represent about 80 percent of lending to the euro area,”Draghi said. “The banking channel is crucial to the supply ofcredit.” He predicted banks will experience “very significantfunding constraints” for the “whole” of 2012.

Banks from the 17-nation euro region need to refinance 35percent more debt next year than they did this year, according to aBank of England study. Lenders have more than 600 billion euros ofdebt maturing in 2012, around three quarters of which is unsecured,the study says.

The ECB is focusing on greasing the banking system to fight thedebt crisis as it resists calls to increase its bond purchases toreduce governments' borrowing costs. Today's lending exceeded the442 billion euros awarded in the ECB's inaugural 12-month loan in2009.

The ECB said 123 banks shifted a total of 45.7 billion eurosinto the three-year loan from an existing one-year facilityallotted in October. The central bank will offer a secondthree-year loan on Feb. 28 and borrowers have the option ofrepaying the funds after a year.

“It's very significant and very helpful for the banks,” JacquesCailloux, chief European economist at Royal Bank of Scotland GroupPlc in London, told Bloomberg Television. “But it's not going tobring about a turning point in this crisis.”

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