* ECB seen cutting rates again by 50 basis points
* Economists looking for signal on how far rates could fall
* Trichet may say whether further liquidity action likely
By Marc Jones
FRANKFURT, Nov 4 (Reuters) - The European Central Bank is expected to cut euro zone interest rates by 50 basis points for the second time in just under a month on Thursday, as it squares up for its likely first recession.
ECB President Jean-Claude Trichet has already said that a cut is possible and all 81 analysts in the latest Reuters poll are sure it will happen. With economic data making ugly reading and inflation worries fading, most expect a 50 bps reduction.
That would take ECB rates down to 3.25 percent, the lowest level in more than 2 years, and mirror the emergency cut it made on Oct. 8 in tandem with six other central banks, including the U.S. Federal Reserve and the Bank of England.
Interest rate traders, who often anticipate bigger and faster policy moves than the more conservative analysts, have priced in a 75 basis point reduction on Thursday. That would mark the biggest rate move since the ECB took over euro zone monetary policy at the start of 1999.
The Fed and Bank of Japan lowered rates last week and the BoE is also tipped to cut British borrowing costs on Thursday.
Economists believe the ECB is now setting itself up for a series of rate cuts. The only question is how low they can go as inflation falls and the euro zone faces a likely recession for the first time in its almost 10-year history.
"The ECB can use the drop in inflation as a green light to cut interest rates despite the fact they are actually cutting on the back of views of meltdown in the financial system and the economy going into a straight recession," said RBS analyst Jacques Cailloux.
Goldman Sachs economists, who also predict a 50 basis point cut this week, say Trichet could signal more cuts at his news conference. "As always the language will be the most important thing to watch and in particular to what extent they are signalling more cuts are to come, and how fast they are willing to do it," said Goldman economist Dirk Schumacher.
"We see a 50 basis point cut plus a dovish message. We think that by the end of Q1 next year they would have cut rates to 2 percent."
That would match the all-time low in 2003. Statistics also point to a 50 basis point move this time. Six of the nine cuts since 1999 have been by that amount and the last two, on Oct. 8 and before then in June 2003, were both by 50 basis points too.
The ECB raised rates as recently as July this year due to inflation worries, and a reduction would mark a sharp turn of direction.
ECB policymaker Erkki Liikanen warned last week that financial crises, if not properly handled, could even lead to deflation -- the first policymaker to mention this threat.
Many people expect third-quarter GDP data, to be released on Nov. 14, to confirm the region is officially in recession, while the latest figures show the private sector economy took a massive hit from the global troubles.
Business confidence has dropped to record lows in Germany, France and Italy. The services sector PMI fell to its lowest level since Oct. 2001 last month and manufacturing activity fell to its lowest in the 11-year survey history.
INFLATION TO DEFLATION
While the slowing economy is worrying, a positive consequence for the ECB is that this has helped to rein in inflation from this summer's record 4 percent far faster than expected.
"Trichet won't drop the inflation warnings altogether but he will make clear that the inflation worries compared to a couple of months ago have come down significantly, understandably so given that the economy, or at least the business sentiment, is deteriorating sharply." said Goldman Sachs' Schumacher.
Goldman thinks inflation could drop to ECB's 2 percent ceiling early next year while Holger Schmieding at Bank of America said the ECB may soon be worrying about deflation rather than inflation. "At current oil prices, inflation could trough just below 1 percent in June and July next year before trending up thereafter," he said.
Trichet is also likely to assess whether the ECB has done enough to get banks lending to each other again, economists say.
"He will stress again that the ECB is willing to do all it can to ensure the functioning of money markets and the financial system and that includes international corporation," said Schumacher. (Reporting by Marc Jones; editing by David Stamp)