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LONDON, Sept 17 (Reuters) - British interest rate futures

fell on Wednesday after the rescue of U.S. insurer American

International Group, although worries over the impact of

the credit crunch on banks continued to haunt markets.

Stock markets have fallen sharply this week after the demise

of Lehman Brothers rattled confidence and raised fears

the lending crisis could have a larger than expected impact on

the global economy.

Expectations for lower interest rates in major economies had

also grown earlier this week but, while concerns over the

banking sector continued to trouble markets, those expectations

have now eased.

"The market has moved from expecting the possibility of

co-ordinated rate action to focus on co-ordinated liquidity

provision," said RBS strategist Mark Capleton.

By 0754 GMT, short sterling interest rate futures

were trading between 3 and 11 ticks lower across the strip.

Yields on ten-year government bonds were flat at 4.42

percent -- having touched a six-month low on Tuesday. The

December gilt future was 8 ticks higher at 112.49.

Shares in British bank HBOS were down more than 40

percent. The FTSE 100 was 0.7 percent lower.

The U.S. Federal Reserve kept rates on hold in the world's

biggest economy on Tuesday, disappointing some who had thought

the central bank would want to act to boost sentiment.

"The Fed has opted not to be goaded into cutting rates after

several days of eye-watering equity moves, and signs of

considerable distress in credit markets," said Rob Carnell, an

economist at ING.

"We suspect, however, the Fed will ultimately be driven by

markets ... and a marked worsening of the economic newsflow,

coupled with clearer evidence that inflation has peaked, will

result in the Fed responding with rate cuts."

Investors will get some idea of whether Bank of England

policymakers are growing more dovish at 0830 GMT with the

publication of minutes from September's rate-setting meeting

when rates were held at 5 percent.

Labour market data is also due at 0830 GMT, with economists

expecting another big rise in the number of people claiming

jobless benefits as the economic downturn gathers pace.

The Bank of England has made 25 billion pounds available in

short term funds this week to help ease the liquidity squeeze.

* Dec gilt future 112.49 (+0.08)

* 10-year yield 4.42 percent (UNCH)

--------------------- KEY MARKET DATA---------------------------

Long Gilt futures Gilt benchmark chain

Short Stg futures Cash market quotes

Deposit rates Sterling cross rates

UK debt speedguide Econ. indicator polls

--------------------KEY MARKET REPORTS--------------------------

Gilts Sterling

Euro Debt Dollar

U.S. Treasuries Debt reports

-------------------- GILT STRIPS DATA --------------------------

Gilt strips data All gilt strips

Gilt strips IO Gilt strips PO

A list of all the strippable British gilts

--------------------- FOR MORE NEWS ----------------------------

Top British news World news

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(Reporting by Bate Felix)

Keywords: MARKETS BRITAIN GILTS

tf.TFN-Europe_newsdesk@thomson.com

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