* Expected to cut rates to 1.0 pct, maybe last cut in cycle
* ECB to reveal decision on possible alternative measures
* Alternative measures expected to include refi expansion
* Divided over bolder step of asset purchases
By Marc Jones
FRANKFURT, May 7 (Reuters) - The European Central Bank is widely expected to cut interest rates on Thursday to 1.0 percent, but markets are more focused on any "alternative measures" to get the euro zone economy back on its feet.
Analysts polled by Reuters were unanimous that the ECB would cut rates by 25 basis points to a fresh record low, finishing a job they had expected it to do last month.
The decision will be announced at 1145 GMT. There is a strong feeling that this will be the final cut in a cycle where the Governing Council has slashed the refi rate from 4.25 percent since last October. (For graph, click http://graphics.thomsonreuters.com/RNGS/MAY/RATE.jpg)
Several policymakers have said they are unwilling to go below 1 percent for practical and psychological reasons. Attention is now turning to what additional steps, such as quantitative easing, they could take to fight the recession.
President Jean-Claude Trichet has promised to reveal this meeting what, if any, unconventional tactics it will use. However, policymakers appear to be split on what to do.
Comments from influential policymakers including Axel Weber and Juergen Stark suggest that the ECB is highly likely to extend the maximum period commercial banks can borrow funds to up to 12 months from the current limit of six months.
Economists had expected this announcement last month, just as they had predicted a 50 point rate cut to 1 percent at the Council's April meeting, when it delivered only 25 points.
Weber, who heads Germany's Bundesbank, has also suggested that any move on extending loan maturities should come with a guarantee that interest rates will not be cut further.
Other ECB members, including Vice-President Lucas Papademos and Athanasios Orphanides, have floated a bolder approach of buying assets such as bank bonds or commercial paper.
SPLIT
Economists are equally split on which path the ECB will take.
"The big focus will be on what measures Trichet announces as regards a possible step towards quantitative easing. There are a lot of options on the table," said Mark Miller, a senior economist at Bank of Scotland.
"Extending the maturities (on borrowing) is one of the safer bets but I personally feel the ECB will take a route of buying private sector assets, for example higher quality corporate bonds."
Others think the bank will shy away from such a big step, at least for now.
"Although some ECB board members have advocated the buying of corporate bonds or commercial paper, some national central banks are sceptical. The mixed experience of the Bank of England boosts the arguments of the latter group," said Nomura analyst Laurent Bilke.
Some are somewhere in between, expecting it to kick off by extending its lending maturities but also strike a compromise by building in the option to move on to asset buying if the economic situation does not improve.
"Although the Governing Council will not rule out the option (of asset purchases), buying private sector debt securities seems to be regarded as a plan B," said Fortis bank economist Nick Kounis.
BoE policymakers also meet on Thursday. They are expected to leave UK rates unchanged at 0.5 percent and interest is focused on the BoE's progress report on its own programme of asset purchases. (For story, please double-click on [ID:nL6960209])
GREEN SHOOTS
Economists will also be scouring Trichet's comments at the 1230 GMT news conference for any hints that the ECB has spotted any green shoots of economic recovery beginning to emerge from the rubble of the financial crisis -- something which policymakers in the U.S. and Britain have tentatively pointed to. [ID:nN05470010]
Better than expected euro zone business and consumer sentiment this month, alongside improvements in closely watched forward-looking indicators such as PMI and business activity data have sparked hope the worst of the recession is over.
But other data has continued to disappoint. The European Commission this week predicted the euro zone economy would shrink by 4 percent this year and 0.1 percent next year, well below the ECB's current worst case scenarios. [ID:nL4633310] [ID:nL5499553]
Unemployment also rose, retail sales plunged by a record 4.2 percent in March suggesting trouble in the highstreet, while prices being charged by goods makers also fell more than expected, pointing to further deflationary pressures.
"It will be interesting to see how much weight, if any, Trichet puts on the improvements in the business surveys," said Bank of Scotland's Miller.
"Against those signs of hope you see a continuing decline in things like lending growth to the private sector which is falling off a cliff at the moment."
While the ECB is almost certain to trim its headline rate to a new all-time low of 1.0 percent there is expected to be little reaction in money markets rates.
The bank's current tactic of pouring billions of euros of
extra funding into the euro zone financial system means
bank-to-bank rates
A further twist is that Trichet has signalled the overnight deposit rate will not fall in tandem with any cut to the main rate. It means the gap between the two would narrow and half undo a recent change designed to get banks lending between themselves again by making it less attractive to deposit cash at the ECB.
(For scenarios of possible ECB decisions please double-click on [ID:nL4716383], for possible changes to liquidity operations [ID:nLN116922])