* Bank of Korea holds rates at record low for 4th month
* Says, for first time during crisis, economy bottomed
* Says rising oil prices to increase inflationary pressures
* Bond prices plunge as rates seen rising from late 2009 (Adds snap poll, updates markets in para 7)
By Seo Eun-kyung
SEOUL, June 11 (Reuters) - South Korea's central bank said Asia's fourth-largest economy has hit bottom but warned that oil prices were fuelling inflationary pressures, sparking a plunge in bond prices on investor bets that rates could rise before the end of the year.
The Bank of Korea kept the benchmark interest rate steady at a record low of 2.0 percent for a fourth consecutive month, as expected, and said it remains uncertain if the country would return to growth at pre-crisis levels quickly.
But Governor Lee Seong-tae warned that oil prices have emerged as a new risk to both growth and inflation, and said the central bank was watching how high levels of short-term cash affect asset prices.
"I see inflation pressures higher than two or three months ago. I'm not worried much about prices, but it's hard to say that there will be no problem," Lee told reporters.
He said for the first time since the crisis started that the economy, which was showing signs of a turnaround, had "flattened out" due to aggressive policies by the government and central bank.
South Korea's economy barely averted recession by expanding 0.1 percent in the first quarter after a 5.1 percent decline in the fourth quarter of 2008.
Bond prices fell across the board, with the 1-year treasury yield jumping 31 basis points to a 5-month closing high of 2.95 percent, as investors boosted bets on an interest rate rise within this year.
MOP UP LIQUIDITY
The price of U.S. crude oil has more than doubled in just five months to hit an 8-month intraday high of $71.93 a barrel on Thursday on expectations of growing demand in line with signs of a recovery in the world economy.
The Bank of Korea cut the 7-day repurchase agreement rate by 3.25 percentage points between October and February and flooded markets with cash to protect the economy from crisis.
As the global economy stabilises, bond investors now bet that rising inflation down the road would prompt the Bank of Korea to begin raising interest rates from late this year at the earliest or absorbing cash from an earlier date.
The 10-year breakeven inflation rate -- the yield spread between nominal treasury bonds and inflation-linked treasuries -- has surged to a near 10-month high of 2.75 percentage points by Wednesday from a 2009 low of 1.12 percentage points in January.
Analysts said the bank may begin absorbing funds before raising the interest rates to prevent inflation expectations from giving rise to asset price bubbles.
"It's highly possible that (the Bank of Korea) will take action to absorb liquidity first, and I think Governor Lee wanted to send such a signal to investors today," said Kong Dong-rak, a fixed-income analyst at Taurus Investment and Securities.
South Korean media has published stories warning against the risk of asset price bubbles and the head of the top financial regulator said last week he would take measures should short-term liquidity "disturb" markets.
In one instance of soaring asset prices, South Korea's junior Kosdaq stock market has jumped 55 percent since early March to trade about 10 percent above the level seen when the crisis started in mid-September. (Additional reporting by Cheon Jong-woo, Writing by Yoo Choonsik; Editing by Ken Wills & Jan Dahinten)