* Deflation risk now slight
* Rate pressure could check recovery
* Italian GDP to fall 5 percent in 2009
(Adds details from speech)
By Stephen Brown
ROME, May 29 (Reuters) - The European Central Bank's Mario Draghi said on Friday there were no definitive signs yet that the global financial crisis was coming to an end, although the risk of protracted deflation now appeared slight.
"There are encouraging signs. The likelihood of deflation, in the sense of a protracted decline in the general price level, now appears slight," he told the Bank of Italy's assembly.
But he added: "It is not yet possible to point with certainty to a definitive cyclical inversion."
The Italian member of the ECB Governing Council said there would be upwards pressure on world interest rates in the next two years from the need to place "massive volumes" of government securities on the market, which would "check" economic recovery.
Draghi said the latest forecasts saw Italy's gross domestic product contracting about 5 percent this year, after a drop of 1 percent in 2008. The public deficit could grow to over 4.5 percent of GDP this year and more than 5 percent in 2010.
He put a damper on talk of Italy's recession being over the worst already, saying any such signs "come from the financial markets and opinion surveys, more than from the statistics available to date on the real economy".
COMPANIES "STRANGLED"
The Bank of Italy governor painted a bleak picture of the Italian labour market, saying workers on unemployment benefits and seeking work were already 8.5 percent of the workforce and could rise to above 10 percent.
This meant household income and consumption would continue to fall despite lower inflation, causing Italian firms to cut back even further on capital goods purchases.
"Excessive mortality (of firms) due to financial strangulation of too many companies that have the potential to prosper after the crisis has passed is a second, serious risk for the Italian economy," said Draghi.
Draghi said the ratio of public spending to GDP, already at its highest since World War Two in 2008, could rise 3 points this year to over 50 percent of output.
"There is a danger that the economy will have to bear the burden of extremely heavy taxation for many years," he said, adding that the lack of jobs and investment would leave Italy's "private capital -- physical and human -- impoverished".
But Draghi said the crisis had been less traumatic for Italian banks than other countries and "taxpayers have not been saddled with the costs of losses and bankruptcies".
Although profits are down and bad debts are growing, stress tests estimating the impact of banks' balance sheets if Italy's economy actually got worse in 2009-2010 "indicate our banking system's ability to hold up, even under more adverse scenarios".
But Draghi recommended that banks "limit the distribution of profits" to shareholders and said the revision of supervision in Europe "needs to be strengthened" in some points. (Additional reporting by Giselda Vagnoni and Luca Trogni)