SINGAPORE -- The cost of dollar funding in Asia dropped further on Tuesday after concerted efforts by central banks around the world to contain the financial crisis, but credit stress remained in some countries.

Global credit markets showed signs of thawing thanks to cash injections, interest rate cuts and guarantees on bank deposits by central banks and governments, fuelling hopes that the worst of the financial crisis may be over.

The rate on overnight dollar deposits fell to 1-1.25 percent in Jakarta from 1.5-1.75 percent on Monday, traders said.

"I think dollar deposit rates will stay at this level for a while, maybe even lower," said a trader in Jakarta.

Overnight rates fell as low as 0.9 percent in Singapore but some deals were done near 2 percent, which was higher than the US Federal Reserve's 1.5 percent target.

In Manila, overnight dollar deposits were quoted at 1.5 percent. That followed the drop to a four-year low in the London interbank offered rate for overnight dollars on Monday.

But a trader in Bangkok said overnight dollar rates were as high as 3.25 percent. "Credit lines are still tight," he said.

The cost of overnight funding hit 10 percent after the collapse of Lehman Brothers in mid-September but has fallen gradually as central banks around the world pumped billions of dollars into money markets and cut interest rates.

Three-month interbank dollar deposits were quoted between 3.3-4.6 percent in Singapore, down from 4.3-5 percent on Monday.

The rates were between 5 and 5.25 percent in Jakarta and at 4.0 percent in Manila, traders said.

NASCENT IMPROVEMENT

The Bank of Japan on Tuesday offered one trillion yen ($9.8 billion) in loans through auction and offered an unlimited amount in one-month dollar funds at a fixed rate of 2.110 percent.

Meanwhile, Hirohide Yamaguchi, the government's nominee for Bank of Japan deputy governor, said that Japanese money markets remained stable compared to the United States and Europe although tensions were gradually rising.

Australia's central bank provided less cash than required on Tuesday as interbank rates showed signs of easing.

In addition to money injections and coordinated interest rate cuts, governments in the United States, Europe to Asia have promised to guarantee bank deposits, and in some cases have taken stakes in banks with toxic assets.

Federal Reserve Chairman Ben Bernanke said on Monday that he was encouraged by the nascent improvement in credit conditions that was due to measures to shore up the banking system and to ensure liquidity in certain securities like commercial paper.

Investors expect the Fed to lower interest rates by either 25 basis points to 1.25 percent or by 50 basis points to 1.0 percent at its policy meeting next week.

The price of short-dated US government notes fell on Tuesday as investors dumped safe-haven government debt on signs of a thaw in the global credit crisis.

The yield on three-month Treasury bills which moves inversely to the price, rose to 1.27 percent, the highest since US investment bank Lehman Brothers collapsed in mid-September. Bond yields move inversely to prices.