CAIRO, May 23 (Reuters) - Egyptian treasury bill yields rose at an auction on Thursday and the central bank cut the offering size as the market continued to adjust to new rules that limit the amount banks can channel into money market funds to buy T-bills.

Traders said a liquidity shortage in a number of banks seemed to have reduced the amount available to invest in T-bills, which was also pushing up yields.

Egypt's central bank, worried that banks were investing too much of their cash in local money market and fixed income funds, said on May 9 that banks would not be able to invest more than 2 percent of their Tier One capital in the funds, down from the previous 5 percent. ID:nL6N0DV4O1

A lack of demand for bills after the decree was issued last week prompted the central bank to cancel last week's auction of six- and 12-month bills and reduce the size of an auction of three- and nine-month bills on Sunday, dealers said.

One analyst estimated that the decree meant funds would have to shed securities worth about 12 billion Egyptian pounds ($1.7 billion), but it would take no more than one or two months for them to do so.

The average yield on 2.85 billion Egyptian pounds ($408 million) of 182-day treasury bills climbed to 14.363 percent from 13.789 percent at the last auction two week ago. The central bank had offered 4 billion pounds.

The yield on 4 billion pounds of 357-day treasury bills rose to 14.824 percent from 14.739 percent from two weeks ago, the central bank said CBEY . ($1 = 6.9819 Egyptian pounds)

(Reporting by Patrick Werr; Editing by Toby Chopra)

((patrick.werr@thomsonreuters.com)(+20-2-2578-3290)(Reuters Messaging: patrick.werr.thomsonreuters.com@thomsonreuters.net))

Keywords: EGYPT TBILLS/