* Some policymakers see greater chance more easing needed
* Sentance sticks with rate hike call for fourth month
* One MPC member sees risk of economy losing supply capacity (Edits)
By Sumeet Desai and Fiona Shaikh
LONDON, Sept 22 (Reuters) - Some Bank of England policymakers thought the case for more monetary easing had strengthened in September, leaving Andrew Sentance again isolated in wanting a quarter-point rise in interest rates.
Minutes of the Monetary Policy Committee's Sept 8-9 meeting showed an 8-1 vote for leaving interest rates on hold at a record low of 0.5 percent, as expected, with Sentance calling for higher rates for the fourth month running.
Most MPC members thought there were substantial risks to the outlook on both sides and stood ready to respond in either direction but some of them argued that the chances that more easing would be needed to bolster the economy had gone up.
Sterling fell nearly a third of a cent against the dollar and gilt futures rallied as traders bet the Bank could yet expand its 200 billion pound asset-buying programme -- or quantitative easing as it is known. The U.S. Federal Reserve signalled on Tuesday it too stood ready to inject further stimulus.
"The arguments proposed by the doves on the committee are gaining greater currency with the other members," said Samuel Tombs at Capital Economics.
Most analysts expect the BoE to hold policy steady well into next year as the economy is only just recovering from the worst recession since World War 2 and sharp government spending cuts are likely to dampen growth next year.
There are already signs that the impending cuts are hurting sentiment, amid reports that hundreds of thousands of public sector workers could lose their jobs over the coming years.
"Recent developments indicated that the headwinds to a recovery in private sector demand in the UK and overseas were somewhat stronger than previously thought, and that the downside risks to activity had increased," the minutes said.
The latest purchasing managers surveys pointed to a softening in growth in the third quarter, while retail sales unexpectedly fell in August and the housing market showed signs of stalling.
MPC member Adam Posen said last week that a possible next step for the BoE could be to engage in "heavy-duty credit easing" -- targeting specific areas of the economy, like the United States did with the housing market -- if it was needed.
But analysts reckon Britain's economy would have to take a sudden turn for the worse for the BoE to pump more money into the system, as market interest rates are already very low and there was no sign that capital markets were not functioning.
"In our view, the bar to a further extension of QE in the near term remains fairly high," said Simon Hayes, economist at Barclays Capital. "There is a legitimate question mark over the effectiveness of further asset purchases."
BoE chief economist Spencer Dale may shed more light on the outlook for policy in a speech today at 1730 GMT.
BALANCED RISKS
The MPC noted that there was a key risk that persistently high inflation outturns -- the latest number was 3.1 percent, more than a percentage point above target -- would become embedded in consumer psychology.
It said in the minutes that so far there was little sign of this happening. But the bank's own survey published last week after the September meeting showed inflation expectations creeping up to hit a two-year high.
Against the risk of higher inflation expectations, MPC members were also worried that growth could slow sharply and push inflation well below the 2 percent target in the medium-term.
"(Q2) growth had been accounted for by contributions from stockbuilding and public expenditure, both of which would fall back in due course. Some indicators also suggested that service sector output growth could weaken during the second half of the year," the minutes said.
One MPC member thought this had raised the risk of the supply capacity of the economy taking a hit if the H2 slowdown prompted firms who had been expecting a pick-up to start laying off workers and scrapping investment plans.
That would result in higher price pressures at a time when VAT and higher food prices are already likely to keep inflation high.
Sentance stuck with his view that the time was right to start gradually withdrawing some monetary stimulus and that it was risky for the MPC to keep accommodating price shocks.
"In this member's view, a well-communicated policy of gradually increasing Bank Rate would not destabilise business and consumer confidence and would reduce the risk of a sharper jolt to confidence from larger unexpected rises at a later stage," the minutes said.
(Editing by Toby Chopra)