ECB rise not certain as Asia subprime fears grow

NEW YORK/LONDON (Reuters) - Central bank officials said market turmoil made a euro zone rate rise far from certain while three Asian banks' heavy exposure to the limping U.S. home loan sector reinforced global credit worries on Friday.

In the U.S., the Federal Reserve refrained from open market operations ahead of a weekend for the first time since May, helping steady markets, while economic data from July pointed to economic strength just before credit markets began to tighten.

Major U.S. share indexes rose more than 1.0 percent as unexpectedly strong data on home sales and durable goods relieved anxiety about the economy.

Earlier in the day, national central bank officials told Reuters the ECB was focusing on financial market turbulence, saying it would be the decisive factor in determining whether it raises rates by a quarter point to a six-year high of 4.25 percent.

Investor nerves were kept on edge as Singapore's DBS Group Holdings (DBSM.SI), state-controlled Bank of China (3988.HK) and its Hong Kong subsidiary, BOC Hong Kong (2388.HK), revealed a combined exposure to the U.S. subprime mortgage market of almost $13 billion.

The news raised fears that Asian banks, generally risk averse following the Asian financial crisis 10 years ago, were more vulnerable to the crisis as investors had thought.

Stock markets tumbled from Sydney to Seoul in response but later on Friday, European and U.S. stocks were firm.

"If there is a normalization in the markets a rate hike is still possible. If not the ECB will wait with the next step," said a senior official at a euro zone national central bank.

The credit squeeze on financial markets has worsened since August 2, when ECB President Jean-Claude Trichet said "strong vigilance" was needed on inflation, language the ECB has used the month before all rate increases in its current cycle.

Many analysts assumed the ECB would tighten policy again in September after it put out a statement this week on a money market tender which also highlighted Trichet's August 2 stance.

That interpretation was wrong, the national central bank official said. Japan's top financial diplomat said the worst of the market adjustment was over, although it would linger for some time, and there was no wider economic danger.

"(Volatile markets) should not negatively affect the economy," Naoyuki Shinohara, vice finance minister for international affairs, told reporters.

US, EUROPE CALMER

The Federal Reserve refrained from any open market operations, only the second day it has not pumped money into the financial system since a credit squeeze began two weeks ago.

Earlier this month investors were convinced that the Fed would have to make an emergency cut in benchmark interest rates before its next policy meeting on September 18 to free up liquidity as financial institutions had increasing difficulty accessing credit lines.

But a reduced flow of news about struggling mortgage companies and a faltering commercial paper market, along with moves by the Fed to inject money into the financial system, has put expectations for an emergency Fed cut on the back burner.