ECB says all options open to temper market rates


* ECB holds rates as expected

* Fed delay of stimulus exit takes pressure off ECB to act

* Draghi says all options open to keep lid on market rates

* No euro FX target but watching impact on growth, inflation

* Euro zone more resilient to troubles such as in Italy

By Eva Taylor and Ingrid Melander

PARIS, Oct 2 (Reuters) - The European Central Bank is watching moves in market interest rates closely and is ready to use any policy option to temper them if needed, its president said on Wednesday.

The central bank was "particularly attentive" to any moves in market rates which could threaten economic recovery or push inflation too low, Mario Draghi told a news conference after the ECB left official euro zone rates at a record low 0.5 percent.

A majority of economists polled by Reuters expect the ECB to keep its key rate at 0.5 percent until at least April 2015. They also predict it will serve up another course of long-term cheap liquidity to banks (LTRO), possibly by the end of this year.

Analysts have also not ruled out an interest rate cut.

"With regard to money market conditions, we will remain particularly attentive to developments which may have implications for the stance of monetary policy," Draghi said.

"We are ready to use any instrument including another LTRO if needed."

While the ECB did not have a target for the euro, which is close to a two-year high against a basket of other currencies and could rise further since the U.S. Federal Reserve decided not to begin winding back its money-printing programme, Draghi said it was monitoring its potential impact on the currency bloc's economy.

"The exchange rate is not a policy target for the ECB ... However, the exchange rate is important for growth and for price stability, and we are certainly attentive to these developments."

The ECB has grown concerned about market rates, which moved higher over the summer at the prospect of the Federal Reserve unwinding its stimulus.

Seeking to guide them down, the ECB said in July it would keep its rates at current or lower levels for an "extended period". That forward guidance, which Draghi reaffirmed on Wednesday, struggled to gain traction until the Fed last month delayed any action.

Excess liquidity - the amount of money beyond what the banking system needs to function - has fallen to 221 billion euros from over 800 billion early last year, approaching a level expected to push market rates closer to the ECB's main rate.

The excess has fallen as banks repay the LTROs they took from the ECB in late 2011 and early 2012 and the ECB is concerned that higher short-term market rates that banks use when lending to each other could hurt the euro zone's recovery and push inflation further below target.


SLOW RECOVERY

The euro zone economy is broadly sticking to the ECB's scenario for a slow recovery. Inflation slowed to 1.1 percent in September - its lowest since February 2010 and a level that allows the ECB to maintain its loose monetary policy.

However, manufacturing growth in Italy and Spain eased off in September, highlighting the fragile state of the recovery in the euro zone periphery. Greece's contraction deepened.

"Confidence indicators up to September confirm the expected gradual improvement in economic activity from low levels," Draghi said. "Underlying price pressures in the euro area are expected to remain subdued over the medium term."

Italy's political troubles - keeping a fragile coalition government from having to call new elections - are also in the background, but Draghi played down any threat of contagion to the currency bloc.

Draghi said the euro zone was now more resilient, thanks in part to the ECB's pledge to buy the bonds of euro zone member states if needed to protect the currency bloc, and structural reforms enacted by governments.

"It doesn't really hurt the ... euro zone as it used to do a few years ago. The euro zone and euro (are) more resilient," he said.

A new LTRO could aim to raise excess liquidity, and ease banks' funding situation before the ECB's asset quality review (AQR) next year, a precursor to its new supervisory role.

But the fall in market rates has relieved some of the pressure to act, and the ECB risks disappointing markets if banks, which have been repaying early some of the twin LTROS from 2011 and 2012, show little interest in additional loans.

The forward rate which shows where one-year Eonia rates are seen in a year's time, has fallen to levels last seen in July when the ECB launched its forward guidance.