The European Central Bank faces a grilling on Thursday on the euro zone's recovery outlook, bank stress tests and its liquidity operation plans.

At its monthly policy meeting, the bank is expected to leave interest rates at a record low of 1 percent.

ECB President Jean-Claude Trichet is likely to face questions at the post-meeting news conference on whether it still sees a moderate recovery in the euro zone this year, despite government austerity measures to pacify markets rattled by Greece's debt crisis.

At the weekend, Trichet dismissed the possibility of Europe slipping back into recession and said budget cuts and structural reforms would help economic recovery while bank stress tests would help restore confidence.

Markets will also listen for any comments on a recent rise in overnight and longer-term money market rates.

ECB KEEPS REFI RATE AT 1 PERCENT, SAYS RATES APPROPRIATE

The ECB cut interest rates to 1 percent more than a year ago and is expected to say they remain appropriate.

* Probability: High.

* Market reaction: Little. Given the sovereign debt worries, markets and analysts now see no change in rates before the second quarter of next year.

ANNOUNCE EXTENSION OF UNLIMITED LIQUIDITY

The ECB could extend a promise to lend banks all the money they want in its weekly operations beyond the current deadline of mid-October and offer the same terms for monthly and three-month loans.

* Probability: Low.

* Market reaction: Such a move could be interpreted as suggesting pessimism about the state of the banking system. The euro could fall a few ticks. It would increase downward pressure on money market rates.

But as banks seemed to cope well last Thursday when they had to repay 442 billion euros ($590 billion) in one-year emergency loans [ID:nLDE660119], new announcements on liquidity operations are unlikely.

ANNOUNCE NEW LONG-TERM LOANS

The ECB said last month it would carry on holding fixed-rate three-month liquidity operations with full allotment until September 2010. Given that, and last week's modest demand for six-day funds, the ECB is unlikely to announce new measures now.

* Probability: Low.

* Market reaction: The biggest impact would be felt in longer-dated money market rates.

ANNOUNCE TOUGH NEW COLLATERAL RULES FOR PRIVATE-SECTOR BONDS

The ECB has said it will release its new scale of graded haircuts -- under which it lends less than the nominal value of some bonds offered as collateral -- to come into effect from the beginning of next year.

* Probability: Low for substantial tightening.

* Market reaction: There could be a flight to government bonds if private sector debt gets shorter haircuts. Bank shares are vulnerable if this makes fund-raising more expensive.

FISCAL CONSOLIDATION

The ECB could back government austerity measures, challenging the view that these threaten economic recovery.

* Probability: Medium to high.

* Market reaction: Fresh comments from Trichet that the recovery is intact could calm bonds market.

STRESS TESTS

Results of EU-wide bank stress tests are due to be published at the end of July. The ECB could give an indication of how they are going so far.

* Probability: Low to moderate.

* Market reaction: Any indication the stress tests are going well could boost markets and increase risk appetite.

FOREIGN EXCHANGE INTERVENTION HINTS

The ECB has the option to try to arrest this year's sharp plunge in the euro with intervention.

The pace of the post-January fall is faster than the last and only time the ECB intervened in the foreign exchange markets, in 2000, although the euro is well above the level it was then. ECB policymakers have so far not shown concern about the level of the euro but Trichet could brush off his verbal intervention strategy and describe the moves as 'brutal'.

Anything stronger than a few words of moral support for the euro would suggest intervention is not off the agenda.

* Probability: Very low, especially since the euro has gained some ground since the last rate meeting.

* Market reaction: Markets would react furiously to any signs of intervention. The euro could surge almost instantly. Volatility would also filter through to European stock markets.

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For a graph of 2000 FX intervention, double-click on:

http://graphics.thomsonreuters.com/0210/EZ_ERINTV0510.gif

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(Editing by Ruth Pitchford)

European central bank