By Richard Leong

NEW YORK (Reuters) - A key bank borrowing cost for three-month dollars on Thursday posted its biggest daily increase in over three weeks to reach its highest level since May 2009, suggesting tightening conditions in money markets for dollars.

The London interbank offered rate on three-month dollars <US3MFSR=> was fixed at 0.7145 percent, up from 0.7016 percent on Wednesday.

Analysts blamed Libor's rise on declining demand from U.S. money market funds for short-term bank debt, as some funds are converting into ones that own only government securities ahead of industry regulations that go into effect in October.

"The issue is that the largest investor for products that feed into the ICE LIBOR setting needs to hoard liquidity, as

they cannot be sure how many of their investors will pull their cash as the new regulations approach," RBC Capital Markets' head of U.S. rates strategy Michael Cloherty wrote in a research note late on Wednesday.

Since June 24, the day after Britain's vote to leave the European Union, three-month dollar Libor has risen roughly 9 basis points.

The so-called Brexit referendum has stoked bets on more stimulative monetary policy from the Bank of England and European Central Bank to cushion the possible drag on their economies from the vote's fallout. Both central banks have refrained from cutting rates and buying more bonds for now.

The ECB on Thursday kept its interest rates and policy plans unchanged and said the immediate stress caused to markets by Brexit had been contained.

"The calm after the Brexit storm has given cover for central banks to sit on their hands," said Shilen Shah, bond strategist at Investec Wealth & Investment in London.

The Federal Reserve is widely expected to leave rates unchanged at its two-day policy meeting next week even as recent domestic data have signaled the U.S. economy is growing at a modest pace. <FEDWATCH> [FED/DIARY]

Eurodollar futures, which gauge traders' outlook on dollar Libor, fell after a surprise drop in U.S. weekly jobless claims to a three-month low and encouraging details in a report on U.S. mid-Atlantic business activity from the Philadelphia Federal Reserve.

The Eurodollar contract for December 2019 delivery <EDZ9> was down 4 basis points at 98.600, the lowest level since June 24.

(Reporting by Richard Leong; Editing by Jeffrey Hodgson)