* Central bank chief says may need to cut rates further
* Says monetary policy tool hampered by market conditions
* Sees market premiums edging down in coming quarters
* Sees inflation dampened from mid-2009
(Adds details, quotes, crown reaction)
OSLO, Nov 19 (Reuters) - Norway's central bank may cut interest rates by more than its current forecast if market rates do not respond adequately to easier monetary policy, Governor Svein Gjedrem said on Wednesday.
"Our prognosis is for the policy rate to come down below 4 percent, but if interest rate gap does not narrow, we will push harder on the gas," Gjedrem said in a speech.
Norges Bank cut its main interest rate twice in half-point steps in October, to 4.75 percent from 5.75 percent to stave off the worst effects of the global crisis, and forecast that rates were likely to bottom out at 3.75 percent in June 2010.
Gjedrem said that the risk premiums in the money market remained high, which hampered the effectiveness of the bank's monetary policy tool.
"The relationship between Norges Bank's key policy rate and the effects on activity and inflation has been impaired by money market conditions," Gjedrem said in a speech. "The transmission mechanism is not functioning as previously."
Gjedrem said that conditions in the financial markets have improved somewhat recently but access to credit remains tight.
"Premiums are expected to edge down in the coming quarters, but market participants believe that it will take time to restore confidence in banks," he said in the text of a speech to the central bank's regional network.
Gjedrem also said that economic uncertainty remained "unusually high" but that Norway was better positioned to cope with the turbulence than many other countries.
"The slowdown in the real economy is expected to start pushing down inflation towards next summer," Gjedrem said.
"In Norway, the effects of the financial crisis have also occurred more rapidly and become more pronounced than the outlook seemed to imply only recently," Gjedrem said. "Norway is still in a better position than most countries."
Capacity utilisation in the Norwegian economy has been "very high", Gjedrem said and added that the current account surplus is "considerable" and government finances "solid."
Lower interest rates and lower prices for Norway's oil exports have contributed to weakening the Norwegian currency against the euro and dollar considerably in recent months.
"The crown exchange rate is expected to appreciate gradually when financial market conditions improve," Gjedrem said. "The fall in terms of trade may nevertheless imply that the crown exchange rate does not return to previous heights."
The crown initially firmed through 8.9 to the euro on Gjedrem's remarks but then eased back to flat levels around 8.9058 by 1054 GMT. (Reporting by John Acher; Editing by Victoria Main)