* ECB's key mandate price stability
* Sees no Greek restructuring, "very bad idea"
* Greece made progress on austerity programme
By Michele Kambas
NICOSIA, April 27 (Reuters) - Further increases in euro zone interest rates may be warranted if the inflation outlook deteriorates further this year, ECB policymaker Athanasios Orphanides said on Wednesday.
Orphanides, who heads the Central Bank of Cyprus, also dismissed rising speculation of a Greek debt restructuring as a "very bad idea" which, if adopted, ran the risk of spilling into other euro zone countries and beyond the 17-member bloc.
"If the picture we have of inflation in the euro zone deteriorates from what we have seen in the past few months then certainly more adjustment would be required because our primary target is price stability in the euro zone as a whole," Orphanides told a news conference in Nicosia.
The European Central Bank raised its main refinancing rate by 25 basis points to 1.25 percent earlier this month on the back of rising energy and food prices, marking its first hike in almost three years. The market is pricing in the next euro zone rate rise by July at the latest.
Orphanides, a member of the ECB's Governing Council, said updated ECB staff projections in coming weeks could give a gauge of inflationary expectations.
"We in the ECB are sensitive to the uncertainty which is around us and that is why we are very careful.
"If the picture of inflation is such which warrants a further adjustment upwards then that will happen because our primary target is known. If however that is not necessary, and that will be seen in the next few weeks, then further adjustments will not be required."
The head of the world's biggest bond fund, writing in the German daily "Handelsblatt" on Wednesday, said Greece is far from stabilising its finances and should restructure its sovereign debt. [ID:nLDE73Q0O4]
"So far none of the solutions for the Greek debt crisis have worked. And a lot of people - including me - don't believe that they will work in the future," wrote Mohamed El-Erian, chief executive of Pacific Investment Management Company (PIMCO).
But Orphanides praised Greek progress in implementing an austerity programme under the terms of its 110 billion euro ($160 billion) bailout by the European Union and International Monetary Fund.
"A restructure would be wrong. It would be undesirable for the Greek economy, for the economy of the euro zone, unnecessary and it is just a very bad idea," Orphanides said.
"...It would have a chain negative reaction on other economies of Europe, possibly beyond the euro zone," he said. "It is certainly not recommended that the Greek government examine such a possibility, and certainly not for politicians in the EU to discuss this or make comments (to this effect)."
Markets remain wary that Greece will have to resort to some form of debt relief, reflected by record high yield premiums on Greek government bonds compared with benchmark German bunds.
"If the (austerity) programme is implemented, it is not very important what is reflected on the market," Orphanides said when asked why markets were not convinced Greece could handle its debt mountain.
The overborrowed country has secured emergency funding up to late 2012 under the bailout agreed last May.
Financial markets are increasingly convinced Greece will have to renegotiate the terms of its public debt, believing its economy cannot grow fast enough to service a burden that is set to swell to almost 160 percent of national output.
"In the past 12 months we have seen significant progress on the implementation of the programme and I commend the Greek government on this progress," Orphanides said. "I have no reason to doubt the decisiveness and courage of the Greek government to continue this programme."
Editing by Ruth Pitchford