LONDON, July 28 (Reuters) - Banks modestly increased their borrowing from the European Central bank for the second straight week on Wednesday, ensuring that short-term lending rates will stay low in the near term. But a lack of lenders saw unsecured euro interbank rates continue to grind higher as more banks seek funding there since the repayment of 442 billion euros of 1-year money to the ECB at the beginning of July led to a sharp reduction in overall liquidity in the region's banking system. Seventy banks borrowed 23.17 billion euros of three-month funds from the ECB on Wednesday, compared with 24 banks repaying 4.846 billion euros. Taken together with Tuesday's one week tender, liquidity in the banking system has increased this week by just over 7 billion euros. That is on top of an increase of 5.6 billion euros last week and despite all but seven banks passing the recent stress tests. 'The primary concern for the market remains one of credit risk,' said Lena Komileva, head of G7 economics at Tullett Prebon. Despite the stress tests being relatively well received by financial markets and banks' CDS prices dropping, traders said any notable effect on banks' ability to obtain funds would take some time yet. 'In the long run it may give credit departments another reason to take a look and maybe install a few lines, but probably that would only be out to the three-month maturity,' said a trader. 'Eonia should tick lower, but Euribors are more to do with credit than liquidity and from three-months onwards, are properly going to continue to tick up slowly.' The Eonia overnight lending rate was seen fixing between 50 and 51 basis points on Wednesday, given the day's difference between this week's one-week and three-month tenders, before dropping to between around 48 basis points on Thursday. Benchmark three-month euro Libor rates rose a third of a basis point to 0.83063 percent. The ongoing difficulties many banks face in accessing wholesale funding markets and a deterioration of balance sheets was reflected in an ECB survey released on Wednesday that showed euro zone banks expect to continue to toughen lending rules in the third quarter. Credit rating agency Standard and Poor's meanwhile said the European bank recovery was still vulnerable. 'Funding remains a relative weakness in the credit profiles of many European banks that are largely dependent on access to wholesale funding,' S&P said. The rating agency maintains negative outlooks or a CreditWatch with negative implications on 25 of the top 50 European banks it rates.

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