Borrowing in the commercial paper market, a key source of short-term loans for banks and other businesses, slowed precipitously Tuesday amid renewed concern about European governments' debts and saber-rattling on the Korean peninsula.

European banks, normally large borrowers in the market, were largely on the sidelines, reluctant to borrow at the elevated rates sought by lenders, market participants said.

"European banks don't seem that concerned about raising money today," said Chris Conetta, managing director and head of global short-term credit trading at Barclays Capital in New York. "Several large bank issuers have not responded to investors' bids."

There may be a couple of reasons for this lack of interest: banks might already have the funding they need for now, or they may prefer to take up an offer from the European Central Bank on Tuesday to borrow for 91 days at a flat rate of 1%.

"The behavior of many large European banks suggests that they may be in a better liquidity position than many had previously thought," Conetta said.

Still, anxious investors were unwilling to consider offering lower rates to try to lure banks into borrowing. A key benchmark for the commercial paper market, the London Interbank Offered Rate, or Libor, rose to 0.53625% Tuesday from 0.50969% Monday. That is its highest since July 7, 2009, reflecting investors' reluctance to take on risk without added compensation.

Investors were particularly reluctant to consider loans longer than one month. The commercial paper market normally includes loans as short as overnight and as long as 270 days.

The rates for 30-day asset-backed commercial paper--month-long loans backed by tangible collateral--rose Tuesday by 1 basis point, or 0.1 percentage point, for top-tier borrowers. The rate on that debt had been 0.45% a day earlier, the Federal Reserve said, citing statistics from the Depository Trust & Clearing Corporation.

It was unclear how much rates on bank commercial paper rose since there wasn't much trading of these. Bank paper generally is unsecured by collateral.

Some market participants were surprised that rates didn't go higher Tuesday, and expect it to rise in days ahead. The Libor rate for three-month loans in dollars may rise to 0.55% or 0.56% on Wednesday, said Mike Chang, an interest rate strategist at Credit Suisse in New York.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@dowjones.com