Banks queue up for cheap ECB loans

So far, only short-term loans for up to a year benefited from these low rates. But the ECB decided to extend the period with many European banks heavily exposed to government bonds from troubled eurozone countries. This has led to decreasing inter-bank lending due to lack of trust in each other's capacity to pay back.

The ECB has been fiercely resisting pressure from southern countries and market analysts to step in and buy government debt on a massive scale, insisting that it can do so only to a "limited" degree and that it is there to salvage the financial system, not governments.

In a speech on Monday in the European Parliament, ECB chief Mario Draghi warned of a credit crunch if his institution did not intervene to help banks out.

Preventing that from happening was his main task rather than expanding the bond purchasing programme, which was "neither eternal nor infinite." A June 2012 deadline for banks to boost their capital to nine percent risks forcing banks to "fire sell" assets at very low prices and to reduce overall lending even further, Draghi noted.

Despite the high demand for the Wednesday loans, analysts at the Royal Bank of Scotland estimated that about 61 percent of the total sum actually represented a roll-over of banks' shorter-term loans, meaning that net liquidity injected into EU banks only amounted to €191 billion.

"The key question now is whether this net new liquidity will be used to purchase sovereign bonds, lend to the economy or pay maturing bonds," RBS said in a note to investors.

On Monday, Draghi had said that the aim of the new funding was for banks to lend to households and businesses and avoid a credit crunch.

Almost a quarter of the loans - €116 billion - went to Italian banks such as UniCredit and Intesa, insiders told Reuters. In line with the Draghi recommendation, they are not expected to reinvest the money by buying further bonds from their own government bonds, which in turn could create a problem for Rome when it tries to borrow money from the financial markets.

Italian banks have 192 billion domestic bonds on their books, mostly spread among the five biggest banks. The ECB in recent months has almost quadrupled its help to Italian banks, from €41 billion in June to €153 billion in November.

Italian Prime Minister Mario Monti faces a confidence vote on Thursday as he is pushing through a €33 billion austerity package comprising tax increases and a pension overhaul aimed at boosting investor confidence and lowering the government's borrowing costs, which are still well above the 5-percent threshold of sustainable debt.

The measures are expected to be passed, even though public support for Monti has dropped by 15 percent in just one week, according to a poll published in Corriere della Sera.

Ratings agencies have warned Italy and other eurozone countries they may be downgraded if they fail to adopt a "comprehensive solution" to the debt crisis.