MONEY MARKETS-US seasonally adjusted CP market shrinks for 5th week

(Reuters plans to discontinue New York money market reports asof Oct. 15 and fold coverage into daily U.S. Treasuries reports.Significant money market developments will be reportedseparately. Please email comments [e-mail])

* Seasonally adjusted U.S. CP market falls $15 bln on theweek

* U.S. repo rates hold near recent highs

* ECB rates on hold, no discussion of easing

(Adds U.S. commercial paper and repo rates, changes dateline,previous LONDON)

By Chris Reese and Kirsten Donovan

NEW YORK/LONDON, Oct 4 (Reuters) - The amount of seasonallyadjusted U.S. commercial paper contracted for a fifthconsecutive week in the week ended Oct. 3, Federal Reserve datashowed on Thursday.

U.S. seasonally adjusted commercial paper outstanding fell$15 billion to $975.1 billion in the latest week.

Non-seasonally adjusted commercial paper outstanding - whichsome analysts consider is a more reliable reading than theseasonally adjusted one since it has been distorted by thefinancial crisis - rose $1.9 billion to $972.1 billion.

U.S. non-seasonally adjusted foreign bank commercial paperoutstanding fell $200 million to $192.2 billion.

Separately, the key interest rate investors charge WallStreet for overnight cash was holding near recent highs onThursday as bond dealers' demand to fund their trades and bondholdings outweighed investors' willingness to lend.

Analysts attribute the comparatively high rates to dealers'bloated cache of short-term Treasuries as a result of the Fed's"Operation Twist" stimulus program.

Compounding dealers' cash needs has been the effect of theFed's latest round of purchases of mortgage-backed securities,known as QE3, as the U.S. central bank has not settled purchaseswith dealers. Analysts estimate dealers should collect anywherebetween $30 billion to $40 billion from the Fed on its MBSpurchases on Oct. 11.

Until then, the overnight rate on repurchase agreements inwhich dealers use Treasuries as collateral in exchange for cashwill likely stay above the yield on two-year Treasury notes

. The overnight repo rate

is bid 32 basispoints on Thursday, flat from late Wednesday, according tobrokers.

Meanwhile, euro zone money markets were stable on Thursdayafter the European Central Bank kept interest rates on hold,giving no clue when, or if, it may ease them further, althoughmany analysts still expect such a move.

The ECB held its main refinancing rate at 0.75 percent andleft the rate it pays banks to deposit cash overnight - a keyfactor in calculating the rates at which cash is lent to thewider economy - at zero as expected.

However, President Mario Draghi said rate cuts had not beendiscussed at all this month.

"It's looking less likely we'll get a cut next month," saidCredit Agricole's global head of interest rate strategy DavidKeeble in London.

"We're not ruling out a cut, we expect it to come at somepoint, but they're dragging their feet," he said.

The ECB can cut either the deposit rate or the refinancingrate or both. It has typically maintained a fixed corridorbetween the two rates but in order to continue this, any furtherrefi rate cut would have to be accompanied by an unprecedentedfall in the deposit rate to negative territory.

Market pricing based on forward overnight swap rates

and presuming a constant relationship betweenthese and the deposit rate shows that the expectation of a cutin the deposit rate this year remains minimal.

"The deposit rate remains the underlying driver forshort-term interest rates and the macroeconomic impact ofchanging the refi rate alone is not obvious," said London-basedRBS rate strategist Simon Peck.

However, economists polled by Reuters last week expect theECB to cut the refinancing rate to 0.5 percent in the fourthquarter of the year then remain on hold through 2013

.

"Looking at the global backdrop there still remains thejustification at some point on the horizon for a rate cut," RBS'Peck said. "With the focus currently on the OMT program this mayturn into a story for early 2013," he added, referring to theECB's Outright Monetary Transaction bond-buying program.

The Eonia overnight rate is currently at 8.5 basis points

. It is seen at 7 basis points in December and onlymarginally lower through the first half of next year. If adeposit rate cut to minus 25 basis points were being priced in,forward Eonia would likely fall further.

And without further changes to the ECB's remunerationsystem, having a negative deposit rate may not encourage banksto lend more: banks could continue to leave excess cash in theircurrent accounts at the central bank - which pays no interest -rather than lend it to each other or the wider economy.

(Additional reporting by Richard Leong in New York; Editing byJames Dalgleish)

(([e-mail])([phone], ReutersMessaging: [e-mail]))

Keywords: MARKETS MONEY/