Money market pressures cooled on Wednesday on optimism that policymakers may reach a deal to help debt-ridden Greece though doubts policymakers will deliver a permanent solution to ringfence bigger economies kept improvements in check.
Lower-rated eurozone government bonds won some respite from the recent sell-off after French ministers said EU policymakers were likely to reach an accord at a summit on Thursday to ease Greece's debt crisis and avert a default.
The ructions in debt markets had led to a rise in premiums in the rates banks charge to lend to each other as the crisis threatened to send Italian and Spanish borrowing costs to unsustainable levels.
London interbank offered rates for three-month euros fell to 1.54813 percent from 1.55375 percent on Tuesday, according to the latest fixings by the British Bankers' Association.
The gap between three-month Libor and expectations of central bank rates - a measure of counterparty risk - eased slightly to 25 basis points from 26 bps, though this was still near the upper end of its recent range.
The improved sentiment before the outcome of Thursday's EU summit was also evident in the Italian repo market. The cost of raising cash to buy BTPs was around 25-30 bps above that for German debt, around 5 bps tighter than levels seen on Monday, according to Icap.
Rising pressure on the bond and equity markets of the large economies of Italy and Spain forced commercial banks to take up more funds than expected at the European Central Bank's weekly tender on Tuesday. This pushed the liquidity-depending overnight lending rate below the ECB's refi rate of 1.50 percent, at 1.467 percent, on expectations of higher excess cash in the system.
Eonia could fall to 1.15-1.20 percent in the coming week once the excess cash starts flowing into the system and as banks ease off frontloading cash for the reserve maintenance requirements, BNP Paribas strategist Patrick Jacq said.