* BoE slows pace of QE purchases, total stays at 125 bln sterling
* Weekly gilt purchases cut to 4.5 bln sterling from 6.5 bln sterling
* BoE says to buy gilts until July 29, review QE plan in Aug
* BoE leaves rates at record-low 0.5 percent (Adds next week's gilt purchase plans, poll)
By David Milliken
LONDON, July 9 (Reuters) - The Bank of England cut the pace at which it pumps money into Britain's economy on Thursday after unexpectedly deciding not to expand its 125 billion pound asset buying scheme, raising fears it may stop purchases completely.
Financial markets had expected the central bank to increase the programme of quantitative easing by 25 billion pounds, as otherwise the last of the 125 billion pounds looked set to be spent on bonds and corporate debt in the next fortnight.
But instead the BoE reduced weekly gilt purchases to 4.5 billion pounds from 6.5 billion, with the last money to be spent on July 29 before it decides whether to fund future purchases at its Aug. 6 policy meeting.
Gilt futures fell more than a full point and the pound rose around half a cent against the dollar as investors bet the BoE is now done with QE, though economists said there was still a chance the BoE might continue QE once it studied quarterly forecasts in next month's Inflation Report.
"They haven't closed the door on further purchases ... but (the fact that) they have reached this decision today ahead of the Inflation Report sends a very clear signal that that is probably it. Big gilt purchases are almost certainly behind us," said Ross Walker, UK economist at Royal Bank of Scotland.
A Reuters poll showed that 35 out of 56 economists still expected the BoE to increase QE to 150 billion pounds next month.
ECONOMIC FREE-FALL OVER
Britain's economy was in free fall in February when the BoE first proposed boosting the economy by buying financial assets with newly printed money in an effort to persuade banks to lend more freely to the rest of the economy.
The economic slide has now levelled off, although a swift return to growth looks less likely than a month ago.
Unemployment is still rising, manufacturing is still contracting and the recent pick-up in services activity may be little more than firms re-stocking after running down their inventories. But even BoE policymakers have accepted that there is limited evidence that quantitative easing has directly helped the economy.
Figures published by the Bank of England on Thursday showed the average interest on two- and five-year fixed rate mortgages jumped by around 50 basis points in June, and banks have reported that they are only slightly more willing to lend.
Other central banks which have partly followed in the BoE's footsteps of taking extraordinary measures to revive credit markets have also reported mixed results.
The European Central Bank has lent banks hundreds of billions of euros in 12-month funds, only to find they are hoarded in overnight deposit accounts, and has yet to settle any deals in its own 60 billion euro asset purchase programme.
As a result, the BoE could move towards a more targeted approach to quantitative easing in future, economists said.
"It may be that the Bank wants to target the problem more specifically and will be buying other types of assets in future," said Stephen Lewis, economist at Monument Securities.
If so, British companies are uncomfortable with the idea that different measures may help them more.
"After only five months, it is still too early to determine the effects on the wider economy. So a further extension through the autumn is needed, and clear communication of the Bank's intentions throughout will be critical in order to prepare the markets," said Ian McCafferty, chief economic advisor to the CBI, Britain's biggest corporate lobby group. (Additional reporting by Sumeet Desai, Christina Fincher and Fiona Shaikh; Editing by David Stamp/Victoria Main)