US money-market funds have been shunning Irish banks in recent weeks as fears over the European sovereign debt crisis have prompted American investors to keep their money closer to home.

The funds, which provide about €400bn in short-term cash to help European banks manage their day-to-day operations, have dramatically reduced their lending since concerns about a possible Greek default ballooned into widespread fear that the euro itself could be under threat.

"The list of banks able to tap the three-month market remains extremely limited with access spotty and expensive," Joseph Abate, a money-market strategist at Barclays in New York, wrote in a note to clients. Except for banks with little exposure to European sovereign risk, lenders "have found liquidity to be scarce, securing funding only one month and shorter and mostly concentrated inside one week," he wrote.

Market sources said regulatory and political risks were compounding a general fear that national governments might not be able to both support their ailing financial systems and pay back their growing debts.

The decision by German chancellor Angela Merkel to unilaterally ban short-selling of certain securities also spooked investors.

"The Germans really put the cat amongst the pigeons," one senior bond analyst at a Dublin securities firm said. "There is a lack of certainty in the market now so everyone is being really cautious."

Money markets are showing rising levels of mistrust among Europe's banks over the concern that a €750bn bailout package will not prevent a sovereign debt default that might trigger a break up of the euro. Banks had placed €255bn in overnight deposits with the European Central Bank last Thursday rather than with each other.

Bank lending "conveys a lack of trust in the system", said Robert Baur, chief global economist at Iowa-based Principal Global Investors, which manages $222bn (€177bn).

"Banks are a little reluctant to lend overnight as they don't know the full extent of what is on the bank balance sheets."