Signs of investors and banks hoarding funds to protect themselves from further market volatility were widespread, with negative short-term rates in Singapore and Switzerland underscoring the rush into markets considered the safest of havens.

One senior trader at a major European bank in Singapore said his desk has curtailed lending to a few other European banks beyond a few days or a week, mirroring moves by others.

In response, some European banks have turned to the foreign exchange market, particularly FX forwards and swaps, to obtain dollar funding as counterparties have clammed up. Those banks needing dollars have had little trouble tapping the FX markets so far, traders said.

European banks are in the spotlight as the raging euro zone crisis took an ugly twist on Wednesday, with a variety of rumors sparking a sharp selloff in French bank shares and sharp widening of French sovereign CDS spreads that hit U.S. and Asian shares as well.

"There is no denying that accessing funds is hard for certain European names. But we are very far away from the panic times of 2008," said one fixed-income trader at a Japanese securities house in Hong Kong.

The one-year yen-dollar cross-currency basis -- which reflects the premium for swapping yen LIBOR into dollar LIBOR -- extended its rise to 56 basis points briefly, the highest since November 2008. The temporary Thursday level was up 20 bps in a little more than a week and approaching a peak of 77 bps reached during the financial crisis.

"Though we have tools like the Fed's swap lines and massive dollar deposits by some of these European banks sitting offshore, things are quite nervous out there," the fixed-income trader said.

The three-month spread on euro-dollar cross FX swap held around 88 bps in early European trade after having more than doubled in the past two weeks.

Steven Walsh, chief investment officer at Western Asset Management, expects more market volatility and systemic stress ahead because it will take years for euro zone countries to stabilize their debt.

Europe has planned a stability fund, the EPSF, but it's not operational. Walsh said it will need to be enlarged to at least 1 trillion euros -- from around 440 billion euros -- to help put out Europe's flames, but it will take a worsening of the crisis before that will happen. Read More