* Lower demand at ECB 7-day euro tender, markets stabilising * Focus turns to demand for ECB dollars on Wednesday By William James and Saikat Chatterjee LONDON/HONG KONG, Aug 23 (Reuters) - Euro zone banks cut back on their lending from the European Central Bank on Tuesday, adding to signs that recent funding pressures were stabilising, though dollar access remained the market's key concern. Banks borrowed around 15 billion euros less from the ECB than they did a week ago at the central bank's regular one-week tender, indicating a reduced appetite to take extra cash on board as a buffer against market stress. "There has been a little bit more stability in the system, so it may be a question of banks not wanting to hoard as much cash as they wanted to in the past," said Orlando Green, strategist at Credit Agricole in London. Under stable market conditions, banks will also typically borrow less towards the end of a reserve maintenance period. Nevertheless the level of money in the system above that needed for banks' daily operations remained high, showing the extent to which institutions were still cautious about lending to one another. Earlier this month banks borrowed 50 billion euros at a special one-off ECB tender of six-month loans designed to counter rising tension stemming from the euro zone's sovereign bond crisis. Focus will now turn to the ECB's offering of dollar liquidity on Wednesday. Last week, one bank borrowed $500 million from the central bank amid increasing concern that euro zone banks were struggling to find willing lenders in the huge U.S. money market sector. "It is definitely something that we have to monitor -- especially with the euro/dollar basis very wide -- but I don't think we're in a situation where there's a squeeze in dollar funding for European banks," said Credit Agricole's Green. Euro/dollar cross-currency basis swaps, which measure the cost of swapping euros for dollars, remained at levels indicating elevated stress. The three-month swap rate was last at -89 basis points, having fallen to its lowest since 2008 of nearly -100 bps. Fitch ratings said on Monday that the largest 10 U.S. money market funds reduced exposures to European banks and also cut the duration of their loans. Traders continue to highlight the scarcity of unsecured funding for longer than one-month available in both the dollar and euro lending markets. Despite all these strains, three-month dollar Libor has moved at a glacial pace of only 6 bps since mid-July, suggesting that the high cash buffers held by some of the U.S. branches of international lenders are being used to meet demand. The slow increase in Libor has widened the spread between the three month cash rate and the September and December eurodollar futures contracts to 41 and 60 bps respectively. That widening spread is indicative that there is still room for Libor rates to move higher, said Sean Keane, head of Triple T Consulting and former head of money market trading at Credit Suisse in Singapore. (Editing by Anna Willard)

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