CORRECTED - UPDATE 2-ECB's Bini Smaghi: euro zone recovery gradual

(Removes reference to Bini Smaghi as Bank of Italy governor)

* Euro zone recovery gradual, but risks remain

* No major inflation risks; inflation expectations anchored

* Money mkt recovery enabled phase-out of liquidity measures

* No decision yet on exiting low interest rates

(Adds more comments, background)

By Jessica Mortimer and Tamawa Desai

LONDON, Dec 4 (Reuters) - A recovery in the euro zone economy will be gradual and inflation subdued, though risks from unemployment and commodity prices remain, European Central Bank Executive Board member Lorenzo Bini Smaghi said on Friday.

Speaking a day after the ECB outlined plans to start cutting back emergency measures used to combat the financial crisis, he said the move was gradual and the central bank drew a clear distinction between ending so-called "non-standard" measures and raising interest rates, now at a record low 1.0 percent.

"What we decided yesterday was not to exit the interest rate policy but to exit from the non-standard instruments progressively," Bini Smaghi said at a conference in London.

"It's a gradual exit, I think it's timely because the money markets are starting to function again."

But he also said the risks of exiting too late from monetary stimulus were greater than the risk of exiting too early.

"If we wait too much we will have to take measures that are so strong they may rock the boat," he said. "The chances of an early exit are not that great, we should be concerned rather about a late one," he said.

CONSERVATIVE FORECASTS

Bini Smaghi said the ECB did not see any major inflation risks, or risks of deflation, adding inflation expectations were well-anchored.

However, a rise in commodity prices may put upward pressure on inflation and downward pressure on growth, he said.

The ECB's latest staff projections showed inflation in a range of 0.8 to 2.0 percent in 2011, bolstering expectations that the main policy rate will remain on hold until late 2010. [ECB/INT]

The projections on growth released on Thursday, he said, were "a bit more conservative than other estimates, in particular the OECD and the consensus market forecasts".

With the euro zone having emerged from recession in the third quarter, the ECB forecasts were more optimistic than previously, showing the economy growing by between 0.1 and 1.5 percent in 2010. [ID:nGEE5B20H1]

But there are still substantial doubts about the sustainability of the current recovery, and Italy and in particular Spain still lag Germany and France of the euro zone's four biggest economies.

Bini Smaghi said unemployment was a major risk which could hamper the recovery, as well as the fragile financial sector.

He said the euro zone economy has "stopped collapsing" and that confidence has improved, but said "consumption remains weak and retail sales are weak", adding the return to growth in the third quarter had been driven by exports and inventories.

This pointed to a "stabilisation of economy rather than a dramatic recovery", he said, adding that he expects the euro zone to come out of the current crisis both with a lower potential output and lower potential growth.

He did not expect a return to the levels of potential growth seen before the crisis "for a long time".

ECB staff also upgraded their projections for this year, and said they expected gross domestic product to fall between 3.9 and 4.1 percent in 2009, a slightly smaller contraction than the 4.4 to 3.8 percent range given in September.

Bini Smaghi also urged governments to shore up their ballooning fiscal deficits.

"The credibility of the fiscal position relies a lot on a credible path of a consolidation of public finances.

"This frames to some extent our forecasts," he added. (Editing by Ron Askew and Patrick Graham) ((tamawa.desai@thomsonreuters.com; Tel: +44207 542 7018, Reuters Messaging: tamawa.desai.reuters.com@reuters.net))