Banks deposited a record €412bn (£343bn) with the European Central Bank overnight on Monday, a sum close to the "wall of money" it pumped into Europe's banking system a week ago in an attempt to head off a second credit crunch.

The flood of deposits surpassed the previous record of €384bn reached in June 2010, and topped the €347bn put into the ECB "shelter" last Thursday, just before Christmas.

Banks are using the low risk – but low return – ECB facility in preference to lending to other banks. High levels of distrust in inter-bank lending markets could lead to a liquidity freeze of the kind experienced at the beginning of the 2008 crisis.

Last Wednesday, the ECB attempted to lubricate the flow of money between eurozone banks with three-year loans at around 0.75% as fears mounted that one or more eurozone banks might run out of cash. There was also speculation that banks might use the cash to buy up eurozone loans and ease the debt crisis facing some countries. A total of 523 banks took up the offer, applying for loans totalling more than €489bn. It was the largest amount the ECB had ever offered in a single liquidity operation and equivalent to around 5% of eurozone gross domestic product. They received the cash on Friday and now seem to prefer parking it back with the ECB, where it earns only about 0.25%, rather than lend it on to other banks, even though it would earn higher interest rates.

The continuing banking jitters pushed the euro near to an 11-month low against the dollar, with investors fearing further falls if Italy struggles to sell government debt at reasonable interest rates at an auction on Thursday.

Rome will sell €11.5bn of short-term bonds on Wednesday and hold a more challenging €8.5bn auction of three- and 10-year bonds on Thursday. In an indication that traders fear the auction could prove expensive for Italy, the indebted country saw its 10-year cost of borrowing rise by about 11 basis points to 7.13%, before settling back below the psychologically important 7%.

European stock exchanges were largely stable, in anaemic trading, but Italian banks were hit. Italy's UniCredit and Intesa Sanpaolo, whose performances are correlated to the country's bond yields, were fallers, down 4.8% and 2.4% respectively.

Portuguese banks, however rose sharply, on hopes that Chinese investors might take big stakes. Banco Espírito Santo closed up 6.5%, Millennium was 6.8% higher and Banco BPI added 4%. Chinese power group Three Gorges last week bought the Portuguese government's 21% stake in the country's EDP energy group – Portugal's biggest company – providing a €2.7bn boost.

Italy must meet €161bn of debt repayments between February and April 2012, and in order to make the payments needs to re-borrow the cash. The only alternative would be a bailout or a default.

Last week Mario Monti, the Italian prime minister, passed a €33bn package of austerity measures, and his advisers have published a detailed document outlining their bond auction strategy for the coming year. Italy will rely more on unscheduled auctions, and become "very active" in raising short-term debt.

Investors are worried that subdued holi day trading will make it even harder than usual for Rome to raise money at the auction. "It will be a good barometer for market demand, and any hiccups there could be a catalyst that sees the euro break below its current range," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "The concern is the thin markets, and the long maturity of the debt on offer might make it a tough sell."

The euro traded at $1.3070. A fall below $1.2945, a level touched earlier in December, would take the single currency to its lowest level since January.

"The upcoming year is shaping up as a do-or-die year for the euro," said Boris Schlossberg, research director at GFT Forex. "The question on most traders' minds isn't whether the euro/dollar will rise or fall, but whether it will actually survive the year intact."

The ECB liquidity loans have succeeded in lowering inter-bank lending rates. As markets reopened, three-month Euribor rates fell to 1.396% from 1.404%. Longer-term rates also fell, with six-month rates easing to 1.648% from 1.658%, while 12-month rates relaxed to 1.976% to 1.988%.

"It is way too early to declare the ECB loans a success or failure," said Aline Schuiling, a senior economist at ABN Amro. "Markets are very quiet and a lot of institutions are still closed. Never draw any fundamental conclusions in the final week of the year."

The previous largest ECB liquidity operation, which provided banks with €442bn in one-year loans in June 2009, helped pave the way for a pick up in lending to the real economy in 2010.