* Euro interbank rates keep rising despite bank recap plans

* Bank shares rally; money markets await plan implementation

* Recapitalisation seen as boost to freer lending in mid term

By William James

LONDON, Oct 27 (Reuters) - Plans to recapitalise Europe's banks did little to cut the cost of unsecured borrowing between institutions on Thursday, with any loosening of conditions seen tied to medium-term progress towards shoring up the financial sector.

As part of a package of measure to tackle the euro zone debt crisis, banks will get around 106 billion euros in fresh capital to help accommodate losses on sovereign debt issued by the region's struggling peripheral states.

But while equities and other riskier assets rallied on news of the package, benchmark rates for borrowing between banks showed little movement, rising in line with the recent trend, while measures of counterparty risk eased only slightly.

"There is essentially no change in the credit spreads between various European banks," said Chris Clark, analyst at ICAP in London.

Shoring up the banking sector was the most widely anticipated component of the three-pronged deal announced early on Thursday by European leaders, which also covered private sector losses on Greek debt and plans to leverage the region's rescue fund.

"Last night was widely expected, I think. The expectation was already being acted on by banks," said Chris Huddleston, head of money markets at Investec in London.

Huddleston said some banks had been aggressively seeking longer-term funding in markets since September, helping to push interbank rates higher.

Three-month euro Libor rose to 1.52375 percent, extending the trend in place since late August, while the three-month Euribor rate edged higher to 1.59 percent.

Banking shares rallied on the overnight news, pushing the STOXX Europe 600 banking index up 9 percent and the Markit iTraxx index of senior financial credit default swap prices down 33.42 basis points to its lowest since August.

But the easing of broader investors worries over the banking sector was unlikely to translate into freer and cheaper interbank lending in the short term, analysts said.

"A lot of the credit spreads arise because of lending limits enforced by individual banks and these sorts of things do not change immediately. Risk committees and the like must first sit down and discuss," said ICAP's Clark.

"As much as we might hope for some easing of credit conditions, there isn't that much that we've heard today that suggests those credit limits will be radically revised."

MEDIUM-TERM IMPROVEMENT

Though there was little immediate relief in money markets rates, the measures were broadly seen as a positive despite considerable uncertainty over which institutions needed to raise capital and how easily this could be sourced.

"It will gradually help the interbank market... but even once the recaps take place it's going to take time before things start to move in a direction where the money market is more fluid," said Orlando Green, strategist at Credit Agricole.

"Once we get the finer details and the implementation, this should all be pretty helpful for the confidence side of things."

The measures come a day after banks borrowed 57 billion euros from the European Central Bank at an offer of 12-month loans reintroduced to ensure they do not encounter short-term funding problems.

Analysts said that liquidity support by the ECB, which has also offered longer-term dollar funding, had eased the short term pressures in the market, while banking recapitalisations would help to restore confidence over a longer time horizon.

In combination, the two measures were enough to provide some reassurance that there would be no repeat of the plummeting confidence that froze interbank lending in the 2008 financial crisis, analysts said.