Central banks probably will halt their monetary tightening campaign and the Federal Reserve may start cutting interest rates to ward off a global credit crunch, financial market dealers said on Friday.

Investors have slashed bets for euro-zone and Japanese rate hikes since Thursday on fears that widening problems in credit markets will undermine strong global growth.

Central banks are pumping extra money into the financial system to steady nerves. Stocks have fallen and bonds rallied.

Market pricing for a European Central Bank rate hike next month has dropped to less than 50 percent and the chance of a move this month by the Bank of Japan has halved to 35 percent.

Meanwhile, the probability of a U.S. rate cut by the end of September has surged to 75 percent, with a one-in-three chance of an emergency cut to rates before the next scheduled meeting.

Analysts are beginning to question calls for other central banks including the Bank of England, the Swiss National Bank and the Bank of Canada, to lift rates in the next month or two.

Most recent communications from these central banks have signaled that tightening remains on track, JP Morgan economists David Mackie and Bruce Kasman wrote in a note to clients.

However, developments in financial markets are placing these calls on watch as continued turbulence has the potential to change central bank behavior quite quickly.

Key to central banks' dilemma is balancing concerns about inflation against the need to prime markets with enough funds to keep running if panicked investors keep money out of circulation.

Global central banks, led by the ECB, have pump-primed markets with extra funds in the last 24 hours after traders were spooked by the freezing of withdrawals from funds by France's biggest listed bank BNP Paribas.

Still, Chile's central bank shrugged off the turmoil and raised its interest rates on Thursday, echoing a similar move by the Reserve Bank of Australia on Wednesday.

EXPECTATIONS TRIMMED

Norway's central bank is due to meet on rates on August 15 and the Bank of Japan on August 22-23, meetings which are likely to provide the first proper insights into central bank thinking on the seriousness of the current situation.

Swap contracts on Japan's call rate were pricing in around a 35 percent chance of a rate rise to 0.75 percent this month, down sharply from about 75 percent on Thursday.

I don't think this is the end of the U.S. subprime woes. More problems could come up before the BOJ meeting which would make it very difficult for it to raise rates in August, said Takeshi Minami, chief economist at Norinchukin Research Institute.

From the BOJ's track record I wouldn't be surprised if it went ahead with a rate hike this month. But usually it would be hard to hike rates in Japan when the European Central Bank and other central banks are taking action to calm market jitters.

In the euro zone Euribor traders cut bets on a September hike to less than 50 percent from 70 percent at the start of the week, and a move to 4.5 percent next year is no longer seen as an option.

But ECB watchers said it was too early to write off a move to 4.25 percent with market conditions changing rapidly and the next ECB meeting not due until September 6.

In Switzerland rate futures still point to a better than 50 percent chance of a hike to 2.75 percent on September 13, but the move looked 100 percent certain only days ago.

The Fed is the last major central bank to meet, with its policy meeting scheduled to start on September 18.

Markets are ramping up bets for a cut after more than a year of rates on hold at 5.25 percent. At 1130 GMT the September Fed funds futures contract was discounting a 75 percent chance of policy easing by the end of September and the chance of a rate cut this month was about 33 percent.

But some economists said the Fed had felt for a long time that credit risk was being priced too cheaply in financial markets and signaled at its policy meeting on Tuesday that recent market turmoil had not altered its view.

The Fed made a clear statement this week that market difficulties were not enough to derail their baseline economic view and I don't think that what has happened since will have changed that, said former Fed economist Dean Maki, chief U.S. economist with Barclays Capital in New York.

The Fed said on Tuesday that while downside risks to growth had increased due to tighter credit conditions and volatile markets, the economy's moderate expansion remained on track.

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