UPDATE 2-China Dec inflation eases from 11-yr high: source

(Adds report from state council meeting)

BEIJING, Jan 14 (Reuters) - China's consumer price inflation in December eased to 6.5 percent from a year earlier, off an 11-year high of 6.9 percent in November, official sources told Reuters.

If confirmed when official data are released next week, the drop would provide some relief to policy makers in Beijing, who have voiced growing alarm about inflationary trends.

But the state council, or cabinet, said after a meeting on Monday focused on inflation that there would be no let up in government intervention to hold down a range of prices until there is clear evidence of success.

For the first time, the cabinet spelled out the list of basic necessities whose prices are normally set in the open market that it is temporarily controlling, mentioning grain, meat, cooking oil, poultry, animal feedstock and liquefied gas.

"When significant price surges do not exist, China will stop the intervention in a timely manner," the state council said in a statement.

It hinted that the price intervention could continue into March, saying that market supplies must be protected through the National People's Congress, the annual parliament which will open its annual meeting that month.

The cabinet also pledged to maintain strict controls on central government-set prices of oil, gas and electricity, and said local governments would freeze prices for water, heating, public transport, medical services and public parks.

Zhou Xiaochuan, central bank governor, has long expressed optimism that December's inflation data would show a marked moderation because of a high base effect from a year earlier.

A pace of 6.5 percent would match October and August as the second fastest on the year.

The consumer price index CNCPI=ECI for all of 2007 probably rose 4.8 percent compared with a 1.5 percent increase in 2006, the sources told Reuters.

2008 INFLATION

China International Capital Corp, a top China-based investment bank, raised its forecast for 2008 full-year inflation to 5.0-5.5 percent, a full percentage point higher than its previous range.

Ha Jiming, its chief economist, said global oil and grain prices and domestic pork prices would provide most pressure, while China's new labour law would also push production costs up.

Ha suggested that Beijing lean towards credit tightening, yuan appreciation and agricultural subsidies to ease inflation.