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By James Mackenzie
(Reuters) - The European Central Bank's incoming president signaled on Wednesday the bank stood ready to carry on buying the bonds of troubled euro zone governments, suggesting he is ready to intervene to steady markets in the face of German misgivings.
Mario Draghi also said the 17-nation euro area faces significant growth risks -- a comment that hints that he may be ready to support a cut in interest rates soon after he takes over from Jean-Claude Trichet next week.
The Italian made the comments as European leaders headed to Brussels for a crunch summit aimed at getting a firm grip on the euro zone debt crisis, with France and Germany at odds over how much the ECB should be involved in the policy response.
"The Eurosystem is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission," Draghi said at a conference in Rome.
The ECB's non-standard policy measures -- the crisis response it has rolled out on top of interest rate policy moves -- have also included the provision of unlimited liquidity to banks, and purchases of covered bonds.
In its latest provision of funds, the ECB lent banks 57 billion euros on Wednesday in the first of two new offerings of one-year loans designed to give institutions greater funding security and neutralize the threat of a new credit crunch.
In his Rome comments, Draghi used language similar to that employed by the ECB to explain the reactivation of its bond-buying program in August, when it said the program was aimed at "restoring a better transmission of our monetary policy decisions taking account of dysfunctional market segments."
The central bank launched its bond-buying plan in May last year, intervening in debt markets to lower the borrowing costs of countries snared by the debt crisis that has since escalated and now risks tipping the world's leading economies into recession.
The decision to reactivate the program in August and buy the bonds of Italy and Spain came after they appeared to be getting dragged into the debt crisis.
The decision was far from unanimous, however, and led to the resignation of Juergen Stark -- the second heavyweight German policymaker to quit the ECB this year over the plan.
Bundesbank chief Axel Weber, who had been in pole position to succeed Trichet, departed in April and in doing so opened the way for Draghi to take the ECB presidency.
Draghi's comments set him apart from Trichet and opened the way for continued ECB bond-buying, though the Italian said it is up to governments to deal with the roots of the crisis.
Trichet had signaled that the central bank was looking to withdraw from the bond-buying policy once the euro zone's EFSF rescue fund gained new powers to intervene on bond markets.
POLICY TENSIONS
Draghi's succession to the ECB presidency coincides with other key personnel changes at the bank and the arrival of new, younger policymakers with a more pragmatic approach than some of their predecessors. This may see the ECB become less inflexible.
Stark, previously Bundesbank vice president, will be replaced by Joerg Asmussen -- Germany's 44-year-old deputy finance minister who is a self-styled pragmatist.
Draghi kept up pressure on governments to put their budgets in order, rather than simply look to the ECB to address the crisis -- an approach he said would not work.
"The interventions prevent imbalances from worsening; they're not enough on their own to resolve the underlying causes," Draghi said, adding that financial system governance in the euro zone should be strengthened and instruments designed to manage the crisis should be activated immediately.
"But without a resolute and durable response which comes from appropriate national policies, which remove imbalances in public finances by promoting growth, the first objective will not be able to be achieved and the second would only be a palliative cure," he said.
Diplomats said Germany was likely to get its way against France in the stand-off over how much the ECB, the ultimate defender of the euro, should be involved in trying to resolve the crisis.
Paris wanted the summit to endorse a continuation of the ECB's "non-standard measures" as long as Europe faces exceptional circumstances.
Chancellor Angela Merkel said Germany opposed a phrase in the summit's draft conclusions urging the ECB to maintain that capacity -- a key backstop against deeper turmoil.
Many analysts believe the ECB is the only institution with the financial firepower to convince nervous and skeptical markets that the crisis can be contained.
GROWTH RISKS
Turning to the economic outlook for the euro zone, Draghi said activity in the bloc was being squeezed by a slowdown in global demand, a fall in confidence among businesses and families and by the negative impact of the crisis on financing conditions.
"The risks of a further weakening in growth prospects are significant, in a context of great uncertainty," he said.
The comment suggests he may favor a cut in the ECB's interest rates from 1.50 percent.
"He himself is probably very much in favor of cutting interest rates," said Berenberg economist Christian Schulz, noting the negative tone to Draghi's comments.
"We'll see if they manage to get that through quickly in November or whether they wait until December, as we would expect."
(Reporting By James Mackenzie, writing by Paul Carrel; Editing by John Stonestreet)
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