The European Central Bank will take a breather this month after unleashing back-to-back interest rate cuts and a slew of other measures, pausing to assess the impact of the crisis-fighting steps it took in the final two months of 2011.

The euro zone central bank is widely expected to keep rates at 1.0 percent at its meeting on Thursday, which started at 0800 GMT, and is the first for two new policymakers - Germany's Joerg Asmussen and Frenchman Benoit Coeure.

In a Reuters poll, 56 of 66 economists expected rates to remain at the current level, which matches their lowest ever. Central bank watchers' interest will focus on the news conference with ECB President Mario Draghi starting at 1330 GMT.

Markets are looking for any sign the ECB could steer rates into uncharted territory in coming months - most analysts expect a cut in February or March - or whether it is happy to leave them as the economy is showing some tentative signs of life.

To fight the crisis, the ECB last month started giving banks ultra-long loans, eased collateral rules and kept buying government bonds - as well as cutting interest rates for the second time since Draghi took over the presidency on November 1.

The ECB has done an awful lot in the last couple of months and this calls for a period of consolidation, let the dust settle and see what's happening, Societe Generale economist James Nixon said.

At the first chance to get 3-year funds, banks took a record amount of 489 billion euros in late December, but so far much of the money has returned to the ECB as overnight deposits.

Due to the generous liquidity provision and a bond-buying program, the balance sheet of the ECB and euro zone national central banks has ballooned by more than 600 billion euros to 2.688 trillion in the last four months.

Analysts will be studying Draghi's comments on this to see whether the balance sheet growth will continue or if the ECB is starting to get more wary of the risks that this brings with it.

Especially interesting in this regard will be comments on government bonds - the ECB has spent 213 billion euros on bonds under the program so far even though some policymakers have openly questioned its effectiveness.

Now that the European bail-out fund is becoming operative and has the right to buy bonds, the ECB could spend less, but it is unlikely to be more communicative on this subject as it wants to keep its options open.

Everyone is looking for more clarity on bond-buying, but nothing has changed, ING economist Carsten Brzeski said. They will continue on this thin line of doing something, but keeping pressure on governments.

GROWING PAINS

Even as recent weeks have seen some slightly encouraging data on the economy, it is too early for the ECB to change its tack only a month after its most recent set of forecasts, and its language on growth is likely to remain much the same.

The ECB cannot relax its attitude towards the economy as the German statistics office said on Wednesday the euro zone's biggest economy contracted in the last three months of 2011.

Despite some stabilization in the pace of the downturn, we expect the assessment of substantial downside risks to the economic outlook to be retained, RBS economist Nick Matthews said in a note to investors.

At the same time, ECB watchers have seen a shift away from the traditional anti-inflation language toward a more growth-focused one as the debt crisis carries with it serious risks, such as banks going on a lending strike.

Inflation at least for the time being is the second derivative, the focus is on growth and they are trying to avoid the economy slipping into a severe recession, maybe due to a credit crunch, ING's Brzeski said.

The weakening euro is also easing some of the remaining fears of persistently falling prices, but will not, at least yet, translate into fears of above-target inflation.

The euro has shed over 8 percent of its value against the U.S. dollar since Draghi assumed office in November and is trading near 16-month lows after rating agency Fitch warned of dire consequences if the ECB does not take more action.

Greek woes will also be front-and-centre at the news conference, with negotiations about the private sector taking a hit on its holdings of the country's debt heating up.

The ECB has persistently argued against private sector involvement (PSI), correctly forecasting that it would increase contagion risks, and Draghi could offer himself a pat on the back for that.

However, he is unlikely to join ECB policymaker Athanasios Orphanides, who last week called for a reversal of PSI. Draghi is expected to merely say that the country has to stick to the conditions of the EU/IMF aid program.

Analysts also see the ECB remaining equally tight-lipped on its opinion about providing the IMF with euro zone central bank funds to help countries mired in the debt crisis, being careful not to close the door on that option.

(They'll just say that) it should be done in a way so that it is not considered indirect aid for governments, Brzeski said.

(Reporting by Sakari Suoninen; editing by Stephen Nisbet)

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