UPDATE 1-Venezuela rules out ending parallel dollar market

* Bolivar trading at historic low above 8.0 to dollar

* Chavez government anxious for "rational" price range (Adds details)

By Ana Isabel Martinez

CARACAS, May 11 (Reuters) - Venezuela will allow a free-floating parallel currency market to continue but is preparing measures to ensure the exchange rate remains within a "rational" range, a senior government source said on Tuesday.

President Hugo Chavez's government has promised action to control the parallel market after the bolivar currency plunged to a historic low of more than 8.0 to the dollar last week.

Volumes have dropped as traders await the measures, and there has been speculation Chavez would outlaw the market all together.

"We are working on a methodology which will help to keep the runaway parallel exchange price at a rational rate," the source, who asked not to be named, told Reuters.

"But there are no plans at all to eliminate the parallel market. That is totally false."

The source said one option might be some sort of price band for the parallel market, linked to the price of local bonds traded abroad.

The president of the Venezuelan parliament's finance commission said on Monday that lawmakers would soon create tougher currency exchange rules to help slow the bolivar's depreciation. [ID:nN10240183]

Chavez also declared war on currency and price speculators at the weekend. [ID:nN09163379]

The bolivar currency VEF= has lost about 25 percent in value on the free-floating market since a January devaluation fixed two official rates of 2.6 and 4.3 per dollar.

Because of restricted access to officially-priced dollars, more than half of imports rely on the parallel market, local economists say.

The convoluted system causes macroeconomic distortions, creates opportunities for making money from the different rates and fuels inflation.

Price rises hit a record monthly high in April and are running at an annual rate of 30.4 percent. [ID:nN07213073] (Writing by Andrew Cawthorne; Editing by Padraic Cassidy)