WRAPUP 1-Bond buys add to tensions within ECB

* Nowotny says no reason for inflation hysteria

* Bank bought 16.5 bln euros of bonds initially

* ECB moves quickly to sterilise bond purchases

* Stark says crisis severe, politicians must rethink

By Paul Carrel and Boris Groendahl

BERLIN/VIENNA, May 17 (Reuters) - European Central Bank policymaker Ewald Nowotny criticised German "hysteria" over inflation pressures on Monday in a sign of tensions over the central bank's foray into buying government bonds. The Austrian central bank governor was speaking after German Bundesbank President Axel Weber last week broke ranks to publicly criticise the ECB's bond purchases, and after commentary in German media suggested the decision meant an end to the ECB's independence and the start of higher inflation.

The ECB revealed on Monday that it had bought 16.5 billion euros in bonds in the initial days of its programme and would mop up the money released by the purchases by accepting one-week deposits -- a key plank in its argument that the purchases will not fuel inflation. [ID:nLDE64G1O9]

Previously, the ECB had said it had no plan to give a regular tally on the bonds it was buying, apparently because it wanted to avoid giving useful information to speculators. Its decision to reveal the information seemed designed to reassure markets that it was acting quickly and decisively to offset the purchases.

"I am...almost astonished that there is so much hysteria -- and unfortunately to a certain extent especially here in the country where we are guests -- about inflationary pressures," Nowotny said in a speech in Berlin.

"This is really not the problem we have. We have a problem of too-slow growth."

Asked whether his comments were directed against Weber, Nowotny said he would not comment on that. Last Monday, Weber warned of the risks of government bond purchases.

"Buying government bonds entails considerable risks to stability policy, and thus I regard this part of the ECB council's decision critically in this exceptional situation," he told the business daily Boersen-Zeitung. [ID:nLDE6492MP]

ECB Executive Board member Juergen Stark said last week he shared Weber's concerns that the purchases posed inflation risks, and reiterated on Monday that the ECB was determined to avoid these by absorbing extra liquidity created.

"Our primary job is and remains to guarantee price stability in the euro area," he told Austrian radio ORF. "The new measures are not going to drive up inflation." [ID:nLDE64G155]

ECB President Jean-Claude Trichet has been mounting a public relations campaign in German media in a bid to rebuff the view that the ECB is sacrificing its conservative monetary principles by effectively financing government debt. [ID:nLDE64E08A] [ID:nWEA2291]

But Trichet has conceded the decision to buy government bonds, taken last week to complement the European Union's announcement of a $1 trillion financial safety net for indebted euro zone states, was carried by an "overwhelming majority" among the ECB's 22 policymakers, rather than unanimously.

It is not the first time there has been a split at the ECB; in June 2008 there was a three-way split on interest rates between keeping rates unchanged, hiking them immediately and hiking them later. In the event, rates were held and raised the following month. However, it is relatively rare for policymakers to reveal individual preferences publicly.

WEAKEST LINK

Analysts said ECB policymakers seemed to see Germany as the weakest link in their strategy to calm investors and support the debt of peripheral euro zone nations.

"The focus on the German audience could not be clearer," Unicredit economist Marco Annunziata said.

"Perhaps the underlying subliminal message here is that Germany has become 'dislocated' in terms of the reactions to the 'shock and awe' rescue programme launched a week ago."

Nowotny also insisted on Monday there was no reason to worry about the future of the euro currency EUR=, which fell to a four-year low against the U.S. dollar.

"There is no euro problem," Nowotny said.

Noting that the euro was in a range of $1.20 to $1.30, he added: "We are absolutely...in the normal range, so there is no specific reason for any special hysteria."

The euro slid to $1.2237 on Monday as investors worried that austerity steps to repair government finances in the euro zone would slash economic growth. In the long term, weakness of the euro could fuel inflation.

"Unfortunately, in Germany the first impression is that of a central bank that has resigned itself to financing profligate governments," Annunziata said.

"This instinctively raises fears of a return to high inflation and a debasement of the value of the currency -- fears that will have been strengthened by last week's plunge in the euro."

FISCAL POLICY

A battle may also be brewing in the euro zone over fiscal policy. Stark, one of the architects of the EU's Stability and Growth Pact, said new measures were needed to avoid future debt crises, and that euro zone countries should be inspected by an independent body able to punish them if their budgets tipped too far into the red.

"We should think about an independent commission...which continuously deals with the budget situation in the countries," Stark said. "You could think of something similar to the U.S. Congressional Budget Office."

German newspaper Sueddeutsche Zeitung reported Germany's finance ministry was thinking about a possible law requiring euro zone nations to balance their budgets. [ID:nLDE64G0MT]

It remains unclear whether many of the euro zone's 16 countries, some of them struggling to emerge from recession, would be willing to surrender sovereignty over their national finances in this way.

The dispute within the ECB could affect the choice of successor to Trichet, who is due to step down in October 2011, but analysts still view Weber as the most likely pick.

"He was more quiet for some time ... I thought in order not to hurt his chances of becoming the ECB president," said ING economist Carsten Brzeski.

"Yes, he is hurting his chances, but he is leading by such a huge margin right now that it will not ruin his chances." (Writing by Sakari Suoninen and Krista Hughes; editing by Stephen Nisbet)