GERMAN banks' use of European Central Bank crisis funding dropped by a third in January from the previous month, a further sign that banks in the heart of the eurozone are returning to money markets after last year's credit squeeze.

Banks in countries on the periphery of the 17-member bloc still rely on central bank lending, which, while at a record-low interest rate of 0.75 percent, is above market rates. The divergence complicates the ECB's interest rate-setting plans.

The Bundesbank data released yesterday showed that German banks owed the ECB 49.5 billion euros (US$66.1 billion) at end-January, 23.6 billion less than a month earlier, suggesting they took advantage of the first opportunity to pay back the 3-year loans to the ECB, known as LTROs (Long-Term Refinancing Operations), on January 30.

Most - 20.6 billion euros - of the fall came in German banks' use of longer-term facilities, which cover anything from one month to three years.

The ECB gave banks the ultra-long term loans in two installments roughly a year ago, with eurozone lenders taking more than a trillion euros in cheap cash.

In the first of the twin loans, offered in December 2011, banks borrowed 489 billion euros. In the first opportunity to pay back those loans early, banks returned 137.2 billion euros to the eurosystem of eurozone central banks on January 30.

Banks with market access can get overnight funds at 0.06 percent, while the interest rate for 3-month loans is 0.223 percent.

ECB President Mario Draghi said earlier this month that the financial market conditions had improved significantly and that the early repayments were "a sign of confidence".

"Many banks had accessed (three-year) LTRO for precautionary reasons because they were, a year ago, uncertain about the liquidity situation - about the funding prospects. And now they are less uncertain, than they were a year ago. So, that is also a positive sign," Draghi said in a post-rate decision news conference.

National central bank balance sheets showed, however, that a lion's share of funds paid back came from core countries of Germany, France and Belgium, and that peripheral countries' banks continue to rely to great extent on the central bank for funds.

This complicates the ECB's task of setting interest rates suitable for the whole block, as its policy decisions do not get transmitted in the same form to all countries.

The ECB announced a yet-to-be-activated bond-buying program to address the issue.

While the plan has calmed worst fears in the market, ECB lending data show that national divergence still looms large.

The use of ECB lending also went down considerably in France and Belgium, data from their national central banks showed.

French banks' use of ECB facilities was 152.7 billion euros on February 12, down from 179 billion a month earlier. Virtually all of the reduction came from longer-term refinancing operations, which was cut by 25.6 billion euros.