By Sakari Suoninen and Eva Kuehnen
FRANKFURT (Reuters) - The European Central Bank indicated on Thursday it may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs but the conditions it set and the dissenting voice of its key German member disappointed markets.
In the latest move to contain the euro zone crisis, ECB President Mario Draghi indicated that any intervention would not come before September - and only if governments activated the euro zone's bail-out funds to join the ECB in buying bonds.
"The Governing Council ... may undertake outright open market operations of a size adequate to reach its objective," Draghi told a news conference after the central bank's monthly meeting, using the central bank's code for bond-buying.
The ECB kept euro zone interest rates at a record low 0.75 percent but Draghi said the council did consider a further rate cut on Thursday amid signs that an economic recession in peripheral European countries is spreading across the continent.
A Reuters poll of nearly 50 economists after Draghi spoke found that most expect the ECB to start buying Italian and Spanish bonds in September and to cut rates to 0.50 percent.
Draghi was under intense pressure from investors, European leaders and the United States to deliver on a pledge he made last week to do whatever it takes to preserve the euro by bringing high borrowing costs down.
But shares and the euro fell after the ECB chief's remarks, and Spanish and Italian bond yields jumped, with Spain's 10-year paper vaulting over the 7 percent danger level. <MKTS/GLOB>
"It is quite disappointing ... There is a lack of any action so he has basically passed the buck back on to politicians," said Ioan Smith, strategist at Knight Capital.
Draghi said three ECB committees would now work on detailed methods of intervention and a decision on whether to go ahead would be taken at a later stage.
If the central bank did step in to buy bonds, it would act to assuage investors' concerns raised when it asserted seniority over private bondholders by refusing to join a writedown on Greek debt this year, Draghi said. He did not say how.
The ECB would also consider other "non-standard" measures to rein in the euro zone crisis, he said, hinting it might move to quantitative easing - or printing money - by not withdrawing all the money it creates to buy bonds.
Unlike the U.S. Federal Reserve and the Bank of England, which have engaged in QE since 2008 by creating money to buy securities, the ECB has so far "sterilized" all its purchases by taking in an equivalent amount in interest-bearing deposits.
The bank has already spent 210 billion euros buying bonds under its now dormant Securities Markets Programme (SMP) since May 2010, with limited effect, but Draghi said the new effort would be different in scope and conditionality.
Any new ECB action would be focused on shorter-term debt and was conditional on euro zone governments using their bailout funds first, and on beneficiaries accepting conditions.
"Governments must stand ready to activate the ESM/EFSF in the bond market when exceptional financial market circumstances and risks to financial stability exist," he said.
Italian Prime Minister Mario Monti said after talks with his Spanish counterpart Mariano Rajoy in Madrid that Draghi's statement marked "several steps forward", but it was premature to say whether Rome would apply for such help.
Rajoy called the ECB decisions positive but repeatedly declined to say whether Spain would request an assistance programme, which he has so far resisted.
The Washington-based International Monetary Fund said it welcomed the ECB's willingness to act.
"As we have also emphasized, monetary policy alone cannot solve the problems facing the euro area. But further monetary easing and unconventional support would ease tensions as other policies are implemented and take effect," an IMF official said.
The ECB chief repeated that the euro was "irrevocable" and warned markets it was pointless to bet against the 17-nation single European currency. He also said the central bank was determined to counter any risk of "convertibility" - code for a possible break-up of the euro.
But analysts were underwhelmed by his announcement of possible future action subject to conditions.
Marchel Alexandrovich, senior vice president at Jefferies, added: "What Draghi has basically indicated is that the problem in the bond markets has to get considerably worse before the ECB steps in to help."
The outcome of Thursday's ECB meeting mirrored Wednesday's U.S. Federal Reserve policy-setting meeting, which also dashed expectations of immediate new measures to revive the economy.
The Fed stopped short of offering new monetary stimulus, though it signaled more strongly that further bond-buying could be in store to help a U.S. economic recovery that it said had lost momentum this year.
ECB action is hamstrung by European treaty rules forbidding it from financing governments. Draghi said an ECB legal opinion had ruled out another possible "big bazooka" - giving the ESM bailout fund the right to tap ECB funds to boost its firepower.
The ECB also has to find a way to get any measures past Germany, the euro zone's largest economy and its principal paymaster. The Bundesbank issues regular reminders of inflationary dangers stemming from bond purchases and the limits central banks face.
Draghi said all members of the Governing Council endorsed Thursday's statement with one exception and he took the unusual step of mentioning Weidmann by name as the dissenter, suggesting he was prepared to outvote the German if necessary.
"It's clear and it's known that (Germany's) Bundesbank have their reservations about the programme of buying bonds. The idea is we now have the guidance, the monetary policy committee, the risk committee and the markets committee will work on this guidance and then (we) will take a final decision and the votes will be counted."
Council members who have voted with Weidmann in the past, such as the Dutch and Luxembourg central bank chief and the German member of the ECB's executive board, did not side with him this time, suggesting the Bundesbank chief was isolated.
But his acquiescence in ECB policy is widely seen as vital to preserve public support for the euro zone in Germany.
(Reporting by Sakari Suoninen; Editing by Paul Taylor/Michael Stott)