ECB Takes First Step Towards Exit, More Due in Dec

FRANKFURT (Reuters) - The European Central Bank took its first step toward unwinding its extraordinary support measures for the euro zone economy on Thursday by signaling one-year loans to banks will not be repeated next year.

The ECB kept its main interest rate on hold at 1 percent for the sixth month in a row and ECB President Jean-Claude Trichet promised to announce a decision on the rest of the central bank's policy of flooding markets with cheap and abundant funds in December.

Allowing one-year lending to expire after the operation scheduled for December 16 would already be a step toward weaning banks off the funds which have pushed money market rates to record lows and helped rekindle credit flows.

Asked whether the ECB was ready to drop its one-year operations, Trichet noted that financial markets were not expecting the ECB to announce more one-year operations next year.

"I will say nothing to dispel this present sentiment of the market," he told a news conference. "But the decision will be taken by the Governing Council in the next meeting in a month's time."

Trichet stressed that the ECB's liquidity steps -- including lending banks unlimited funds at fixed rates -- would be phased out in a gradual but timely way, but would not continue at the same extent as in the past.

He declined to say, however, whether the ECB would bump up the price of funds at next month's 12-month operation from the 1.0 percent rate -- a move which would be taken as a signal of a likely rate rise before the end of 2010.

"The ECB has made heavy hints it may not roll out its extraordinary one-year tenders into 2010," said Richard McGuire, RBC Capital Markets fixed income strategist.

"The end of such tenders .... bolster expectations the bank will begin to normalize rates next year."

The ECB's stance contrasts with the U.S. Federal Reserve, which made no change to policy settings on Wednesday despite growing confidence in a recovery, and the Bank of England, which left rates untouched but said it would expand its quantitative easing program by 25 billion pounds.