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Hundreds of euro-zone lenders took out €489.19 billion ($640 billion) in low-interest loans from the European Central Bank on Wednesday, as the currency area extended a massive financial lifeline to its struggling banking industry.

The unexpectedly heavy demand from 523 banks for the three-year loans highlighted the severity of Europe's financial crisis, while also stirring some hopes that the action could help defuse it, or at least prevent it from getting worse.

Investors didn't seem convinced that the loans would drastically improve banks' prospects. After rallying when the ECB announced plans for the program earlier this month, the Euro Stoxx Bank Index fell 1.5% on Wednesday. In a mildly bearish sign about prospects for the euro debt crisis, yields on Italian and Spanish bonds inched higher.

European Banks took ¬490 Billion from the European Central Bank's Long Term Refinancing Operation. Could this provide the turning point in the euro-zone crisis? Simon Nixon and Geoffrey Smith discuss the latest developments.

The ECB's loan program—the first in which it has offered three-year loans—appears to be the central bank's main weapon, at least for now, in combating Europe's crisis. The ECB has resisted pressure from politicians and market participants to aggressively buy euro-zone government bonds, arguing such a move is outside its purview. But if the central bank eases fears about the Continent's banks, that would go a long way toward relieving anxiety about many countries' overall financial health.

Through the loans, the ECB is trying to address a crucial weakness in the euro zone's financial system. Nervous institutional investors have essentially stopped lending to banks, fearful of their heavy holdings of government bonds and other assets that appear at growing risk of default.

If the dry spell persists into 2012, it could become a major problem. European banks have more than €700 billion of their own debt maturing next year, including more than €200 billion in the first three months, regulators and analysts say.

ECB officials feared that without intervention, many banks would cut lending to small businesses and households, strangling Europe's weak economy.

"It's much better to have this funding locked in rather than praying the market reopens," said John Raymond, an analyst with CreditSights in London. "I don't think you can say it's a game-changer…but it sort of slows down the vicious circle."

Under the three-year loan offer on Wednesday, banks could borrow as much as they wanted at the low rate as long as they had the necessary collateral. Another batch of three-year loans will be available Feb. 29.

Politicians including French President Nicolas Sarkozy have floated the idea that banks will use the new ECB cash to buy government bonds in financially shaky countries, where lackluster demand has pushed their borrowing costs to unsustainable levels. But bankers and analysts doubt that will happen on a large scale, given the perceived riskiness of such bonds. Banks are free to use the loans for whatever they choose.

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U.S. officials have urged European leaders to move more aggressively to prevent the crisis from hurting the U.S. economy. The U.S. officials view the ECB loans and other steps by euro-zone leaders as constructive but are pushing for further action to reduce Italy and Spain's borrowing costs.

The 523 banks that borrowed Wednesday range from giants like Italy's Intesa Sanpaolo SpA, one of the few banks to confirm its participation, to tiny lenders. The ECB didn't disclose which banks borrowed under the new program. It's possible that banks from outside the euro zone also pounced on the opportunity to secure cheap ECB financing. Any bank with a legal subsidiary in the euro zone is eligible to borrow from the ECB facility.

"It appears that a very large majority of the large financial institutions" in Europe participated, said Laurence Mutkin, head of European interest-rate strategy at Morgan Stanley.

The ECB's loan program isn't without risks. Some experts and regulators worry banks are becoming more addicted to central bank aid, making it harder for them to eventually stand on their own. At the same time, the program could push banks in countries like Spain and Italy to grow more entangled with their governments—a phenomenon that fueled today's crisis.

While the banks on Wednesday borrowed €489.19 billion, much of that was simply replacing other outstanding ECB loans coming due. Analysts estimated Wednesday's loans injected about €190 billion of new liquidity into the banking system.

Nick Matthews, an economist at the Royal Bank of Scotland, said European banks face about €230 billion of debt maturing in the first quarter of 2012 alone. "This operation is not going to cover all the maturities," he said.

Traditionally, banks satisfied much of their day-to-day financing needs by issuing unsecured bonds to institutional investors around the world. But the market for such debt largely evaporated in July, when Europe's crisis intensified. Regulators and bankers increasingly worry that funding markets could remain shut well into the new year.

The ECB's loans are attractive largely because of their price. The central bank will charge an interest rate that is the average of its benchmark rate over the three-year life of the loans. That rate is currently 1%. It's likely to remain well below what most banks would have to pay to borrow from market sources.

Indeed, the cheap financing is leading some European banks to take steps that further entwine them with their governments.

In Spain Tuesday, the government sold €5.6 billion of bonds in an auction that saw interest rates dive to 1.7% from 5.1% a month earlier. Analysts say the surging demand most likely stemmed from small and midsize Spanish banks buying the bonds in order to use them as collateral for this week's ECB loans.

Such a trade could prove lucrative for the banks, given the gap between the interest rates the Spanish bonds generate and the amount the banks are paying to borrow from the ECB.

But it also means Spanish banks are more vulnerable to their government's financial woes.

In Italy, 14 banks this week issued €38.4 billion of government-guaranteed bonds eligible to serve as collateral with the ECB, according to a document released on Wednesday by Italy's stock exchange. Those banks have been battered amid worries about their excessive holdings of Italian government debt.

"The bank-sovereign nexus still has not been successfully broken and if anything is being reinforced," said Mr. Matthews, the RBS economist.

Write to David Enrich at david.enrich@wsj.com

ECB, European Central Bank, Europe, Europe, government bonds, European banks, European banks, central bank, Spanish banks, government, financial crisis, Italy

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BRUSSELS—Euro-zone finance ministers on Monday confirmed plans to contribute €150 billion ($195.6 billion) in additional bilateral loans to the International Monetary Fund as part of a move to boost its resources for crisis response, but contributions from other European Union members remained unclear as the U.K. held its ground that any additional IMF funds should be part of a global agreement.

In a statement following a conference call among EU finance ministers, Eurogroup President Jean-Claude Juncker said the U.K. indicated it will define its contribution early next year in the framework of the Group of 20 industrialized and developing nations.

The IMF welcomed the announcement of new loans, saying it will help to ensure the stability of the global financial system.

"We welcome the EU finance ministers' support for a substantial increase in the IMF's resources, as we work to strengthen our capacity to fulfill our systemic responsibilities to our global membership," an IMF spokesman said.

The Czech Republic, Denmark, Poland and Sweden, which aren't euro-zone members, indicated they may take part in the process of reinforcing IMF resources, though some EU member states may need approval from their parliaments first, the statement said.

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EU finance ministers held the talks on Monday in a bid to finalize the multibillion-euro loan to the IMF and other steps to build a credible firewall around Italy and Spain, as part of an agreement reached among EU leaders earlier this month.

The additional IMF loans are a linchpin in the EU's latest plan to stave off a collapse of the euro zone, agreed to by a majority of EU nations at the Brussels summit this month. The hastily called conference call shows the urgency with which European leaders have to act and the roadblocks standing in their way.

Roughly €30 billion will be needed to come from the U.K. to bring total contributions, including those from other non-euro-zone EU members, to the target of €200 billion that was suggested by EU leaders at their summit on Dec. 9.

Greece, Ireland and Portugal, which are under bailout programs, won't be among the countries to provide the IMF with bilateral loans.

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The EU finance ministers also failed to reach agreement on a plan to boost the total lending capacity of the euro zone's rescue funds beyond a €500 billion ceiling and didn't make any progress on a plan to make the permanent bailout fund, the European Stability Mechanism, more flexible by introducing an 85% voting rule instead of unanimity.

The U.K. Treasury has said the euro zone should do more to strengthen its own firewall and that it won't commit to any funds to the IMF that are available only for euro-zone countries.

"The U.K. has a couple of formal problems," a euro-zone official said earlier. "They think that the firewall that's been constructed is not fireproof enough."

On Monday, the U.K. government said it has always been willing to consider additional resources for the IMF, but only for the fund to carry out its usual global role and as part of a global agreement.

Sweden's finance minister, Anders Borg, said his country could provide as much as 100 billion kronor ($14.4 billion) in loans to the IMF—the figure mentioned by Riksbank Governor Stefan Ingves last week—but Sweden needed answers to some questions first.

"We need clarity that other countries are prepared to contribute," Mr. Borg said at a briefing held during a break from the conference call.

EU governments must also overcome the resistance of the Bundesbank, Germany's powerful central bank. The Bundesbank is still in talks with the German government over IMF loans, and sees no urgency in that regard, a representative for the Bundesbank said on Monday.

Bundesbank President Jens Weidmann has signaled the central bank's willingness to contribute €45 billion in loans to the IMF, but only if other European and non-European countries such as the U.S. follow suit and the funds aren't specifically directed at Europe.

Facing re-election next year, U.S. President Barack Obama has already poured cold water on the prospect of the IMF's largest contributor giving more taxpayer money to the institution, arguing that Europe is rich enough to solve its own problems.

The finance ministers also failed to make a decision on the question of how the ESM voting rules would work. After the Dec. 9 summit, there had been a move to waive unanimity rules and to allow the ESM to make decisions on the basis of an 85% supermajority, affording it the ability to act faster and even if some euro-area countries disagreed.

But Finland blocked the 85% rule on Monday, an EU official said.

"The Finnish want the unanimity rule reinstituted, to apply if there's a question of raising fresh money [for the ESM], but no other delegation agrees with that. It's a political issue for them that reflects domestic difficulties and it doesn't look like there will be progress," the EU official said.

Meanwhile, European Central Bank President Mario Draghi on Monday said the existence of the euro zone is "irreversible" and that speculation about its breakup is "morbid."

"I have no doubt whatsoever about the strength of the euro, about its permanence and its irreversibility. The one currency is irreversible," Mr. Draghi said at his first hearing of the European Parliament's Committee on Economic and Monetary Affairs since he took the helm of the ECB on Nov. 1. A breakup of the currency union would have extraordinary costs, he added.

Mr. Draghi said the ECB welcomes the latest decisions by EU heads of state and governments for sound and transparent fiscal rules, as the "new fiscal compact is an essential signal, showing a clear trajectory for the future evolution of the euro area."

—Charles Duxbury in Stockholm, Hans Bentzien and Margit Feher in Frankfurt, Tom Barkley in Washington and Nicholas Winning in London contributed to this article.

Write to Matthew Dalton at Matthew.Dalton@dowjones.com
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