* Three-month Euribor jumps to -0.16%, highest since 2016
* Euribor/OIS spread widest since 2012
* ECB easing off collateral rules should help - analysts
* Elevated interbank rates seen as concern for EZ stability (Updates with context analysis, chart)
By Dhara Ranasinghe
LONDON, April 23 (Reuters) - A key euro zone money-market rate rose on Thursday to its highest level in more than four years, a sign that concerns over fragile southern European states are escalating bank funding stresses across the region.
In a throwback to the euro zone debt crisis, another indicator of banking sector stress hit its highest Thursday, putting pressure on euro zone leaders and on the European Central Bank, which already moved this week to ease collateral rules.
At Thursday's videoconference, European leaders are expected to move towards joint financing of the post-pandemic recovery by asking the European Commission to propose a fund big enough to target the most affected regions.
But money market stress has been on the rise for some weeks, some of it caused by unprecedented demand for cash in an economy headed for the worst recession in years.
Greater risks surround institutions and economies in the so-called euro periphery -- poorer countries with high debt and sluggish growth. That's making market participants increasingly cautious about banking exposure, said Peter Chatwell, head of rates strategy at Mizuho.
"There is rationale for there to be some stress in funding markets when there is uncertainty about peripheral markets and whether current levels of debt sustainability will be preserved as we go through a huge spending increase," Chatwell said.
"We still have the prospects of a euro crisis materialising in front of us, and the response from euro leaders has been left wanting."
The three-month Euribor benchmark, representing the average interest rate at which a group of European banks borrow from one another, was fixed on Thursday at the highest since early 2016, at -0.16% versus -0.19% on Wednesday.
The rate, the basis for pricing products such as interest rate futures as well as savings and mortgages, was at -0.35% in early April.
The Euribor rise has pushed the gap over the euro zone's overnight indexed swap (OIS) to around 30 basis points EURE-OS3M=R, its widest since August 2012.
While Euribor is a floating rate, the OIS represents the rate set by the monetary authority. A rise in the spread is therefore a prime indicator of banking sector stress.
Antoine Bouvet, senior rates strategist at ING, said the rising interbank rate stemmed from "the fragmentation between peripheral and core markets".
"Counterparties are asking for greater compensation when lending to southern European banks," Bouvet added.
The euro zone's failure so far to approve joint debt issuance to help out these states has raised their borrowing costs in bond markets and spilled over into their banks.
The stress is evident in the Italian/German bond spread and the euro, which fell to a one-month low.
Italy's 10-year bond yield gap over Germany pushed out to 270 basis points on Wednesday -- its widest in over a month -- but tightened on Thursday after the European Central Bank's late Wednesday announcement eased funding fears.
The ECB said it would allow banks to post collateral downgraded to junk during the coronavirus outbreak. That comes after an April 7 move that loosened collateral rules for banks, making it easier for them to borrow cheaply.
The step also helped Italian bank shares rebound from one-month lows
While the measures should, with time, avert a credit squeeze and stabilise interbank lending rates, some such as Christoph Rieger, head of rates and credit research at Commerzbank, urged caution.
The ECB move could stem further increases in the Euribor but may not bring it down significantly, Rieger said. "The fact that we've had two ECB collateral announcements in a matter of weeks underscores that something is not right," he said
Reporting by Dhara Ranasinghe; additional reporting by Sujata Rao and Saikat Chatterjee; editing by Hugh Lawson and Larry King