The Frankfurt-based ECB awarded 489 billion euros ($645 billion) in 1,134-day loans, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark rate -- currently 1 percent -- over the period of the loans. The ECB also lent banks $33 billion for 14 days in a regular dollar offering, up from $5.1 billion a week ago. The euro jumped half a cent to $1.3198.

Government bond markets may continue to rally if demand for the three-year loans exceeds 250 billion euros, Steven Barrow, head of Group of 10 currency strategy at Standard Bank Plc in London, said before the ECB announced the results.

Europe’s debt crisis has increased the risk of government and bank defaults, making institutions wary of lending to each other and driving up the cost of credit. The ECB is trying to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and households. In addition to the longer-term loans, the ECB has widened the pool of collateral banks can use to secure the funds.

Italian and Spanish government bond yields have dropped since the ECB announced the loans on Dec. 8 as banks buy the securities to use them as collateral. French President Nicolas Sarkozy has suggested banks could use the loans to buy even more government debt.

‘Carry Trades’

“What the ECB wants is that the funds be used by banks to keep handing out loans,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “But there’s a second argument, which is to do carry trades by borrowing on the cheap at the ECB and buying sovereign bonds. We don’t know what the banks are using the money for.”

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

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

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

No Turning Point

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

The ECB is focusing on greasing the banking system to fight the debt crisis as it resists calls to increase its bond purchases to reduce governments’ borrowing costs. It will offer a second three-year loan in February and banks have the option of repaying them after a year.

“It’s very significant and very helpful for the banks,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, told Bloomberg Television. “But it’s not going to bring about a turning point in this crisis.”