The European Central Bank will reintroduce its 12-month liquidity operations to help banks with longer-term fundraising and to reduce jitters in the markets, policymakers indicated on Friday.

Dovish central banker comments also increased analyst and market expectations of an impending interest rate cut, with some seeing a 50 basis point fall as soon as next month, although such a move remains far from certain.

ECB Governing Council member Jens Weidmann said on Friday the ECB had shown in the past that it can provide banks with long-term one-year liquidity when needed, with his colleagues from Austria and Belgium also talking up such a measure.

Austria's Ewald Nowotny said: One of the instruments we had was, in the context of full allotment of policy, to have one-year tenders. I think it might be advisable to think about reintroducing this approach. We could discuss a reintroduction.

Asked whether the ECB could inject another round of one-year liquidity into markets following the recent spike in interbank tensions, the Bundesbank's Weidmann said the ECB had done so in the past and could do so again if needed.

In the past we have said that we are prepared to provide the market with longer-term liquidity when it is necessary, he said.

We still have full allotment (unlimited liquidity) and with the non-standard measures the central bank and the euro system has shown that (it) has the ability to act.

And Belgium's Luc Coene said the ECB could perfectly do longer-term refinancing operations if there were an urgent need.

ECB policymakers rarely talk up measures before there is a general consensus about their being implemented. With three governing council members speaking of one-year liquidity within hours of each other, analysts said it was close to a done deal and could come as early as this month.

This is an environment that is screaming for an intervention by the ECB, Lena Komileva of Brown Brothers Harriman said.

I wouldn't be surprised if it were before the next meeting, she said, referring to reintroducing 12-month liquidity operations. The next ECB rate decision meeting is scheduled for October 6.

The first time the ECB ran a 12-month operation was in June 2009, when it saw blockbuster demand from more than 1,000 banks taking a combined 442 billion euros in annual funds.

However, as money market strains eased, the central bank discontinued those tenders, with the third and so far last one taking place in December 2009.

With long-term ECB-provided funds, banks are less dependent on each other for funding and can plan their lending without having to worry as much about market tensions.

Financial markets have reacted sharply to the recent intensification of the euro zone debt crisis and brisk downturn in the bloc's economy.

The ECB has already reintroduced six-month euro liquidity operations, as well as three-month dollar liquidity.

RATE EXPECTATIONS

Some analysts thought the ECB might go further and reverse this year's two 25 basis point rate increases in October to take its benchmark interest rate back to a record low of 1 percent.

Weak data and increasing prospects of a Greek debt default have given rise to fears of an impending recession in the euro zone, which would give the ECB impetus to cut rates.

We now expect the Euro area to slide back into recession, with GDP declining at a 1 percent annualized pace from Q4 2011 to Q2 2012, JP Morgan analyst Greg Fuzesi wrote in a note to investors.

As a result, we now expect the ECB to cut its main policy interest rate by 50 basis points to 1.0 percent at its next meeting in two weeks' time, he said.

The Bundesbank's Weidmann brushed off suggestions the economy was falling off a cliff, saying the economic situation in Germany was clearly better than the current mood suggested and that a new round of government stimulus measures would not help the overall euro zone situation and could damage Germany's image as an anchor of stability.

A new recession (in Germany) is not my expectation, Weidmann said.

(Reporting by Marc Jones, additional reporting by Eva Kuehnen, writing by Sakari Suoninen, editing by Catherine Evans)

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