The European Central Bank kept interest rates at 1.5 percent as expected on Thursday, but may signal it is back in crisis mode at its upcoming news conference as the euro zone debt crisis continues to roil the bloc.
Economists had been near-unanimous in expecting the ECB to keep rates on hold, having raised for the second time this year only last month. There was little reaction in the euro or benchmark German bunds.
Markets' focus now turns to the 1230 GMT news conference where ECB President Jean-Claude Trichet is set for a grilling on whether the ECB is prepared to restart its government bond purchase program or offer more liquidity to banks following a sharp escalation of the debt crisis in recent weeks.
G7 economy Italy is now in the direct firing line -- a development that has alarmed policymakers.
In a surprise move shortly before the ECB announced its rate decision, the European Commission said it was weighing up increasing the size of the euro zone bailout fund, the EFSF.
With signs that growth is slowing faster than expected in the euro zone core, Trichet is expected to sound a little more cautious on the economy although the more immediate focus is on whether a return to bond buying is on the agenda.
I would expect Trichet to try to raise the probability that they may intervene (in bond markets) but no more than that, said Deutsche Bank economist Gilles Moec.
Despite the EU Commission's statement that it will reassess the scope of the euro zone's rescue fund (EFSF), its new powers to buy bonds in the secondary market or give states precautionary credit lines will not be operable until they are approved by national parliaments in late September at the earliest.
That leaves the ECB as just about the only bulwark against market attacks on Italy and Spain in the short-term.
Spain had to pay higher a higher rate of interest at a closely watched bond auction earlier in the day, underscoring the general recent rise in borrowing costs.
Trichet, whose eight-year term expires at the end of October, is highly unlikely to indicate a reversal in the bank's rate rise plans but the euro zone slowdown means any further hike will almost certainly come in the fourth quarter at the earliest.
The decision to keep rates on rates on hold was very much expected against the current backdrop. What we are looking out for is signs of more dovish language in the policy statement. The economic outlook has changed quite dramatically since the last press conference, said Daiwa economist Tobias Blattner.
Last month the ECB reiterated it was monitoring inflation very closely, which usually means that rate hikes remain on the agenda. Any changes would be seen as a clear hint that the central bank is getting cold feet about rate hikes.
The majority of economists still expect a steady drip of ECB rate hikes but Euribor futures show financial markets have already priced out further rate rises this year.
The ECB's SMP bond-buying program has been in hibernation for over four months despite markets taking aim at Italy and Spain.
Economists argue reactivating could be justified by the enhancements euro zone governments gave to the EFSF late last month, a move it had long been pressing for.
The central bank could also weigh up additional support for money markets, which have suffered intense problems over recent weeks, by reintroducing 6-month liquidity or beefing up other operations.
In May last year, markets went into a frenzy after Trichet said the Governing Council had not discussed the option of buying government bonds. Just four days later, the ECB made a U-turn and started the buying program.
Jens Weidmann, the head of Germany's influential Bundesbank, made a late decision on Wednesday to interrupt his holiday and join the meeting amid the escalation of Italian and Spanish debt market troubles.
His predecessor Axel Weber strongly opposed the bond-buying program and Weidmann is thought to hold similar policy views.
It's possible that the ECB may reactivate it's bond-buying program, possibly even during the press conference, said Nomura economist Jens Sondergaard. (But) we need to see a sharp deterioration from here before they actually step in.
(Additional reporting by Marc Jones; writing by Paul Carrel, editing by Mike Peacock)