The European Central Bank signaled on Thursday that it was buying government bonds in response to a deepening debt crisis as it also offered a new round of liquidity to banks.

But ECB President Jean-Claude Trichet also suggested that interest rates could rise further.

After the ECB decided at its monthly policy meeting to leave its main refinancing rate at 1.5 percent, Trichet said the bank's bond-buying program, which had been inactive since March, was still operational.

I never said myself that it was dormant, Trichet said, adding that weekly ECB bond-buying data would show what actions had been taken by the central bank. It is an ongoing program and we are totally transparent, he said.

Traders said they saw the ECB buying Portuguese and Irish government bonds in the secondary market as Trichet spoke, although not those of Italy and Spain, which have also been hit hard by the debt crisis.

They are in the market buying Portugal and Ireland right across the curve, one trader said.

Trichet came close to admitting as much.

Asked about buying bonds, he said: I would not be surprised if before the end of this teleconference you will see.

The central bank has come under pressure to act following a sharp escalation of the debt crisis in recent weeks. G7 economy Italy has seen its bond yields soar, which has alarmed policymakers since bank exposure to its debt dwarfs that of the countries already bailed out -- Greece, Ireland and Portugal.

Trichet also said commercial banks would be able to access as much liquidity as they needed from the ECB until at least the end of the year, and announced a new ECB offer to the banks of six-month money.

Given the renewed tensions in some financial markets ... (the ECB) ... also decided to conduct a supplementary refinancing operation with a maturity of approximately six months with full allotment, he said.

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.

Despite the EU Commission's statement, the fund's 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 on Thursday, underscoring the general recent rise in borrowing costs.

RATES

Despite moving back into crisis mode, Trichet signaled that euro zone official interest rates could rise further, in contrast to easing by the Swiss and Japanese central banks this week.

We will continue to monitor very closely all developments with respect to upside risks to price stability, Trichet said, deploying the same phrase he used after the bank raised interest rates last month.

Economists said before the news conference that use of the phrase would signal a further rate rise this year, although markets are not pricing in any further tightening before 2012 as the euro zone debt crisis bites even more deeply.

The ECB's bond-buying program had been in hibernation for over four months despite markets taking aim at Italy and Spain.

(Additional reporting by Marc Jones; writing by Paul Carrel/Mike Peacock; Editing by Andrew Torchia)

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