(Recasts with news conference quotes)
By Paul Carrel
BERLIN, April 23 (Reuters) - The European Central Bank should cut its interest rates to 0.5 percent and may need to adopt a policy of quantitative easing to support the euro area economy, leading German economic think tanks said on Thursday.
In a twice-yearly report, the institutes also forecast the German economy -- Europe's largest -- would contract by 6 percent this year and expected a "painful" time ahead.
The German economy has not yet shrunk by more than 1 percent in any year since World War Two.
Finance Minister Peer Steinbrueck shared the institutes' gloom, saying on Wednesday it was "not unlikely" the economy could shrink by 5 percent or more this year.
"Given the depth of the economic slump and low inflation in the euro area, the European Central Bank should lower its main interest rate to 0.5 percent," said Kai Carstensen of the Ifo economic institute, presenting the report at a news conference.
"However, even an interest rate of zero would be an insufficient reaction to the crisis," he added.
The institutes forecast consumer prices in the 16-nation euro area would decline by 0.2 percent on average in 2010 and by 0.1 percent this year.
Carstensen said the ECB should extend the maturities on its tender operations, adding: "If a lasting decline in the credit volume or monetary aggregate in the euro area cannot otherwise be prevented, the ECB should shift to a policy of quantitative easing -- buying company and/or government bonds."
The ECB, unlike other major central banks, is not buying up assets, but has said it is keeping its options open.
The Organisation for Economic Cooperation and Development (OECD) has also called for quantitative easing from the ECB.
"PAINFUL" OUTLOOK
The German economy had suffered the worst of a major shock, Carstensen said, adding: "The earthquake in output is behind us. Now come the aftershocks, the resulting damage and the clean up -- above all on the labour market."
"This will take a long time and will be painful," he said.
Germany's jobless rate would rise to an average 10.8 percent next year from 8.6 percent in 2009, the institutes forecast.
The impact of the downturn on the labour market has been offset so far by firms making use of a "short hours" facility to cut their working hours instead of laying off workers.
The Labour Office pays half the social security contributions for workers on short time work to encourage firms to avoid lay-offs. Since October, firms have applied for short-time for 2.15 million employees.
The facility lasts 18 months, though the government is considering extending it. Carstensen said the job market faced real problems when the impact of the measure fades.
To combat the recession, Germany has launched two stimulus packages it says are worth 81 billion euros ($105.5 billion).
"Against the backdrop of the expected increase in the budget deficit, (calls for) a further economic stimulus package should be rejected under the current circumstances," Carstensen said.
The institutes forecast Germany's budget deficit would swell to 5.5 percent of GDP in 2010 from 3.7 percent this year -- far surpassing the European Union's limit of 3 percent of GDP.
They also forecast German exports, long a mainstay of the economy, would fall 22.6 percent this year before returning to growth in 2010 with a 2.4 percent increase. (Editing by Andy Bruce)