UPDATE 1-ECB watching inflation developments very closely-Stark

* Recent rise in inflation no immediate cause for alarm

* Prices must be monitored closely as risks can change rapidly

* ECB has slowed its exit strategy, not stopped it (Adds background, detail)

By Marc Jones

BAD GODESBERG, Germany, Jan 19 (Reuters) - The European Central Bank is watching inflation developments very closely, Executive Board member Juergen Stark said on Wednesday, but that medium-term it remained in line with the ECB's target.

Euro zone inflation jumped to 2.2 percent last month, the first time in over two years it moved beyond the ECB's preferred level of close, but below 2 percent.

Stark said the rise was not a reason for immediate alarm but said the situation needed to be monitored very closely and warned that the balance of risks could shift quickly.

"The ECB sees in the near-term higher inflation but our medium-term assessment remains unchanged," he said in a speech at International Club La Redoute.

"We are very watchful what happens on the price front... the balance of risks can shift very quickly so we must stay very vigilant."

The ECB kept interest rates on hold at a record low of 1 percent last week, but its sudden change of tone and warning on short-term price pressures -- has been taken by some in financial markets as a sign it could raise rates earlier than previously thought.

Stark, seen as one of the ECB's toughest inflation fighters, said that rising commodity prices and inflation in emerging countries needed to be monitored closely, warning that it was already a "problem" in countries like China and India.

He said the ECB had slowed the process of reeling in its crisis support in recent months but stressed that it has not stopped it altogether.

"Too much liquidity and too low rates create the wrong incentives," he said, adding that the ECB was purchasing government bonds to ensure its monetary policy functioned and was in no way the bank financing euro zone governments.

He also hit out at rating agencies and bankers. "I am no big fan of rating agencies... They downgrade governments no matter what they do."

On bankers he was equally critical. "We haven't seen the necessary change in mentality from bankers, one has the feeling that the casino is once again open," he said.

DEFAULT DANGERS

Stark also touched on the ongoing euro zone debt crisis. He called for a total change in policy direction in troubled euro zone members Ireland and Greece and said that a debt default, as some economists have recommended, would not resolve the problems.

"What would actually (be) solved by that (default)... the problem would be transferred back to other sectors, notably the banking system," he said.

He also played down claims that countries were becoming increasingly involved in currency manipulation strategies as they seek to boost growth or limit the pain of rising currencies.

"There is no currency war, but an increasing self-confidence of emerging economies," he said.

The idea of euro zone countries jointly issuing bonds also received criticism. "Euro-bonds would be a subsidy (for those with poor ratings). Countries with higher ratings would have to pay higher financing costs in markets," he said. (Reporting by Marc Jones; Editing by Diane Craft)