* ECB extends liquidity lifeline until early 2011
* Holds rates at record low 1 percent, as expected
* Raises growth forecasts but urges caution on outlook
(Adds details, analyst quote, changes byline)
By Sakari Suoninen
FRANKFURT, Sept 2 (Reuters) - The European Central Bank extended its liquidity safety net for vulnerable euro zone banks into next year, delaying its exit from crisis measures as it urged caution about economic recovery.
The ECB also left rates at a record low of 1 percent for the 16th month in a row on Thursday and said policy remained accommodative as the region battles with an uneven recovery and concerns about bank vulnerability.
Although ECB staff raised growth forecasts, President Jean-Claude Trichet said risks were to the downside and the recovery would be moderate with uncertainty prevailing.
"We have to remain cautious and prudent. We don't declare victory," he told his monthly news conference, although he said a double-dip recession was not on the cards.
The ECB extended its promise to lend banks unlimited one-week and one-month funds until at least Jan. 18, keeping liquidity supplies flush through the tense end-of-year period in a move which should keep market rates low.
It will also offer unlimited funds at three-month operations until December, although the cost of these will not be a flat fixed rate but indexed to the ECB's policy rate.
Trichet denied the decision was a signal of an imminent change to benchmark credit costs.
"I'm absolutely clear the Governing Council has no intention to signal any change in the present interest rates," he said. Analysts expect no change to rates before Q4 2011.
PERIPHERAL HELP
While the decision on rates was unanimous, Trichet said the decision on liquidity supplies was by consensus -- usually a sign of some dissent on the 22-member Governing Council.
The extension maintains the lifeline relied on by banks in countries like Spain, Ireland and Greece, although Trichet brushed off questions about uneven performance between core countries such as Germany and those on the rim.
Borrowing from the ECB by banks in these countries has hit record highs in recent months even though total lending has fallen about a third since July, highlighting the difficulties still faced by some institutions.
Ratings agency Standard & Poor's cut Ireland's credit rating last week to AA- on the back of an upward revision to the country's banking crisis bill.
The 10-year Irish/German government bond yield spread has hit record highs and spreads on other peripheral government bonds have also jumped over the last month.
Analysts said the ECB's move might reduce demand at the pre-Christmas three-month operation, when it will also offer extra funds to pad the repayment of the last of 2009's 12-month cash injections.
"It seems they want to cap the attractiveness of a huge operation at the end of the year and then having it expire in the first quarter," Citi economist Juergen Michels said.
GROWTH UPGRADE
Germany grew at its fastest rate since reunification in the second quarter and more than twice as fast as the euro zone average, confirmed at 1.0 percent on Thursday.
But Greece is still in recession and Portugal and Spain managed just a tenth of Germany's growth rate.
"Recent economic data for the euro area have been stronger than expected, partly owing to temporary factors," Trichet said. "Looking ahead, the recovery should proceed at a moderate pace with uncertainty still prevailing."
Nonetheless, ECB staff upgraded growth forecasts for both 2010 and 2011.
Growth is now forecast in a range of 1.4 to 1.8 percent this year -- giving a midpoint of 1.6 percent -- from the 0.7 to 1.3 percent seen in June.
Next year, growth is expected to be between 0.5 and 2.3 percent, from 0.2-2.2 percent in June.
The ECB's quarterly forecasts also showed inflation under control this year and next, with consumer price gains expected to be 1.5-1.7 percent in 2010 and 1.2-2.2 percent in 2011 -- essentially below the bank's two percent ceiling.
Euro zone inflation moderated to 1.6 percent last month but there are some signs of pressure, notably Germany's powerful steelworkers union demanding a 6 percent pay rise.
Expectations of continued ECB liquidity largesse have pushed market interest rates down from 12-month highs over the last month, although pressure points remain.
But turnover in overnight money markets fell back in August and many banks still prefer to deposit excess funds back at the ECB rather than lending them on to counterparts.
Banks also face a liquidity cliff at the end of September when they must repay a total of 225 billion euros in 12-, six- and three-month funds or roll it into shorter maturities.
The ECB is not alone in dragging its feet towards the exit. Sweden's Riksbank hiked rates on Thursday to 0.75 percent but cited weak growth in the euro zone and United States as a risk to the outlook. The Bank of Japan has boosted its cheap loan scheme and the Federal Reserve took steps towards further stimulus by reinvesting maturing mortgage-related securities. (Editing by Mike Peacock)