* Key rate cut to new record low 1.65 percent, from 2.0 percent
* Spread over ECB rate narrows by 10 bps to 65 pts
* Chief: DKK stable on "strong side" justified narrowing
* Analysts see spread narrowing further
By Anna Ringstrom and Ole Mikkelsen
(Adds c.bank chief, analyst comment, background)
COPENHAGEN, May 7 (Reuters) - Denmark's central bank cut its key interest rate by 35 basis points on Thursday following a 25 point cut by the European Central Bank earlier in the day.
The Nationalbank, which operates a fixed exchange rate policy against the euro, cut its one-week certificate of deposit and lending rate to 1.65 percent, narrowing the spread over the ECB rate by 10 basis points to 65 points.
"The crown has for some time now been stable on the strong side, and we have been able to buy currency in the market," Central Bank Governor Nils Bernstein told Reuters.
"We have therefore found it justifiable to carry out a cautious narrowing of the rate differential in relation to the euro (zone) so it's now reduced to 0.65 basis points," he said.
The Nationalbank has no inflation or money supply target but adjusts rates and intervenes in the currency market for the sole purpose of keeping the crown stable against the euro.
Key rates until May 2008 roughly tracked ECB rates, at a 25 basis points higher level.
But as investors last year fled to bigger and safer markets amid the deepening global crisis, the Nationalbank fought to defend the crown by widening the premium substantially to attract traders.
As investors began returning to Danish markets this year, pressure eased again on the crown, allowing the central bank to start narrowing the spread.
Danske Bank analyst Frank Hansen said the rate cut matched his expectations. "Currency reserves are at an all-time high and foreign currency is still flowing into the country, so it is a good opportunity to narrow the spread a little bit."
Data showed this week that foreign exchange reserves rose more than expected to 286 billion crowns.
Analysts said on Thursday they expected the National bank to narrow the gap further.
Hansen saw the spread at around 45 basis points at the end of the year. "From there it's more uncertain -- about half a point spread may become the new longer-term level," he said.
"The exchange rate will stay very stable, this is a tiny adjustment, really," he added.
The Danish crown currency is pegged to the euro in a 2.25 percent band around a central rate of 7.46038 -- or between 7.6282 crowns and 7.2925 crowns -- in the ERM-2 grid.
It traded at 7.4494 crowns at 1500 GMT, marginally weaker than just before the news.
Denmark's inclusion in ERM-2 includes a commitment to unlimited intervention credit between the ECB and the Danish central bank.
Analysts surveyed by Reuters had expected the Nationalbank to narrow the spread by between 10 and 25 basis points on Thursday.
(Additional reporting by Rasmus Jorgensen and Wojciech Moskwa, editing by Ruth Pitchford/Victoria Main)