The European Central Bank signaled a July interest rate rise and raised the stakes on Thursday in its stand-off with governments over a new bailout for Greece by rejecting any form of debt restructure.

ECB President Jean-Claude Trichet said the bank would exercise strong vigilance on inflationary pressures, deploying a phrase that has consistently been used in the past to signal a hike was a month away.

Trichet used precisely that code in March to flag an April rate rise to 1.25 from 1.0 percent, which was the ECB's first tightening in two years.

On balance risks to the outlook for price stability are on the upside, accordingly strong vigilance is warranted. On the basis of our assessment we will act in a firm and timely manner, Trichet told a news conference after the ECB kept its main refinancing rate at 1.25 percent.

Trichet said evidence since the ECB's May meeting confirmed continued upward pressure on overall inflation mainly owing to commodity and energy prices.

But wary of choking off support too fast, the ECB would continue to provide banks with unlimited liquidity to support the recovery, he said.

The euro initially rose on Trichet's comments before retreating, with analysts saying a hike in July had already been priced in. Worries about a lack of unity of response to debt problems in Greece also dented sentiment.

Firming cost pressures -- euro zone producer prices rose by more than expected in April and headline inflation was 2.7 percent, well above the ECB's target of close to but below 2.0 percent -- had convinced most investors more policy tightening was on the way.

The ECB left little doubt that it will hike its key interest rate from 1.25 percent to 1.50 percent at its July meeting, said Howard Archer, economist at Global Insight.

Beyond July, Trichet left the ECB's options open, saying: We are not signaling any particular pace for the next decisions on our interest rates.

GREECE STAND-OFF

Trichet offered no solution to the euro zone's conundrum of how to engineer private sector involvement in a new package to avoid Greece becoming the euro zone's first state insolvency.

German Finance Minister Wolfgang Schaeuble, facing domestic pressure to involve the private sector in any new Greek bailout, earlier this week demanded a quantified and substantial contribution from bondholders as part of any new package.

Schaeuble also suggested extending the maturities of outstanding Greek debt by seven years. Trichet's comments appeared to underline his opposition to such pressure.

I am not embarking on a dialogue with a particular minister here, Trichet said.

We are not in favor of restructuring ... and so forth, he said. We exclude all concepts which would not be purely voluntary, without any elements of compulsion. We call for avoiding any credit event and selective default, say. And of course, default.

Instead, Trichet said he was surprised by how narrow the view of private sector involvement was and added that privatization was a good way to mobilize private capital.

Asked if the ECB would roll over its own Greek bondholdings, Trichet replied: It's certainly not our intention.

He also indicated the ECB might not be willing to accept Greek bonds as collateral from banks seeking loans if some form of restructuring made the bonds ineligible under ECB rules.

We have a strong determination to apply our framework and our rules, whatever happens here and there. And we have a very clear position in this respect, Trichet said.

LIQUIDITY TAPS STAY ON

While it flagged a July rate rise, the ECB remains careful not to withdraw support to the economy and banking system so fast as to stall the recovery or endanger banks' ability to cope with limited liquidity.

Fears that the euro zone debt crisis might spill over to the banking system and the fact that banks in bailed-out euro zone states remain shut out of credit markets, prompted it to offer unlimited liquidity to banks until at least October.

(The ECB) today also decided to continue conducting its main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the ninth maintenance period of 2011 on 11 October 2011, Trichet said.

Previously, the ECB had committed to keeping tenders on an unlimited funding basis until at least July 12, meaning a decision was due.

New ECB staff forecasts projected 2011 inflation in a 2.5-2.7 percent range, falling back to 1.1-2.3 percent in 2012.

Euro zone GDP growth was forecast at 1.5-2.3 percent this year.

All 74 economists polled by Reuters had expected the ECB to leave rates unchanged at 1.25 percent. Earlier on Thursday, the Bank of England kept its key interest rate unchanged at a record low 0.5 percent.

(Writing by Mike Peacock)

Germany