(Corrects headline, first para and quote to show Draghi speech mentioned impossibility, not possibility, of below zero rates)
HONG KONG, Dec 16 (Reuters) - The head of the Financial Stability Forum said on Tuesday that the impossibility of below zero percent interest rates and the threat of deflation posed a test for monetary policy in some parts of the world.
"Rapidly falling inflation expectations, and in some areas deflation risks together with the impossibility of lowering rates below zero, pose the most challenging test for the effectiveness of monetary policy," said Mario Draghi, who also sits on the European Central Bank's policymaking Governing Council, said in a speech to Asia-Pacific members.
The Federal Reserve is expected to cut rates by at least a half-point to 0.5 percent, with some economists looking for the Fed to lay out what it will do beyond interest rate policy to revive the economy.
Fed Chairman Ben Bernanke has raised the possibility of the central bank buying Treasuries and mortgage agency bonds to revive household borrowing and spending, on top of the Fed's array of asset-support programmes resembling quantitative easing.
In quantitative easing, central banks flood banks with reserves, usually beyond what is needed for zero interest rates, to shore up their health and spur lending. The Fed's balance sheet has already soared to a record high above $2 trillion.
Draghi, who also sits on the European Central Bank's policymaking Governing Council, said the options available to central banks in quantitative terms is fairly wide, including buying government bonds or stocks, as did the Hong Kong Monetary Authority during the Asia crisis.
But he warned that the heightened uncertainty about the economic outlook meant that it would be more difficult for asset purchases to drag down long-term interest rates and key credit spreads with them.
After the FSF gathering in Hong Kong, the body of central bankers and other financial regulators called for additional measures to address the overhang of distressed assets in the financial system.
The FSF also said fiscal stimulus packages were needed to boost domestic demand. It noted that the financial turmoil was affecting the availability of trade finance and was posing a greater threat to the real economy in the export-driven region.
(Reporting by Xi Chen and Frankfurt bureau; Editing by Andy Bruce)