(Reuters) - The world's major central banks said on Tuesday they would extend emergency supplies of U.S. dollar funding to money markets, in a sign that authorities remain concerned about financial instability as governments grapple with debt problems.

The European Central Bank, the Bank of Japan, Bank of Canada, the Bank of England and the Swiss National Bank extended their U.S. dollar liquidity providing operations with the U.S. Federal Reserve until August 1, signaling the situation in money markets is still fragile.

The swap lines were established to ensure banks do not have trouble obtaining dollars, although banks have put the lines to relatively little use since the middle of this year.

The Fed's policy-setting panel opened swap lines, first with the ECB and the SNB in December 2007 and later with other central banks.

These lines were discontinued in January this year because market conditions had improved, but in May the central banks decided to reopen the operations to ease strains in short-term funding markets.

"The Federal Open Market Committee has authorized an extension through August 1, 2011, of its temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank," the Fed said in a statement.

Demand for ECB-Fed dollar swaps was high right after their reintroduction in May, with $9.2 billion scooped up on May 12. However, since early June demand has been muted, and the last nine operations have been for $75 million or less.

Last week the Fed said the only use for the swap line between it and the other central banks came from the ECB and amounted to $60 million, with an interest rate of 1.18 percent.

The SNB has had no demand in its dollar repos since the May resumption.

Traders said the low demand was mainly due to the high rates that central banks charge, but such a facility was useful.

"The price is very high, but the facility is there and in situations where there are strains, everybody can use it as a backstop," a euro zone money market trader said.

"In normal circumstances, you won't use that, but there could be a situation where lots of people need it."

The Bank of Canada said it did not need to use the facility at present, but it was prudent to maintain the agreement.

"This shows that central banks are doing everything possible to prevent tension from reappearing," RBS economist Jacques Cailloux said. "The situation remains fragile, so this is part of the prevention toolkit."

The swap lines are conducted on a full allotment basis with all the central banks participating, except for Bank of Canada, which has a maximum of $30 billion.

Many foreign banks and investors depended on money markets to borrow dollars to cheaply fund their dollar-denominated longer-term investments.

After the collapse of Lehman Brothers, many found themselves scrambling for dollars to fund these obligations, driving up the dollar against local currencies and raising the spectre of widespread defaults.

In the currency swaps, the U.S. Fed offered dollars to foreign central banks, in exchange for their currencies. The foreign central banks then lent the dollars to banks in their domestic markets, enabling firms to access dollars at a time when normal financing channels had shut down.

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