* Refi rate cut sharpest in recent months
* C.bank says lending rates to real economy remain high
* Aims for rouble free float by end-2012
* Putin says quality of recovery is key
(Recasts to stress sluggish credit growth, adds comments by Putin on quality of recovery in paragraphs 9 and 10)
By Toni Vorobyova, Gleb Bryanski and Lidia Kelly
MOSCOW, Sept 29 (Reuters) -- Russia's central bank cut lending rates on Tuesday for the seventh time since April, saying further cuts were possible because sluggish credit growth threatened the country's economic recovery.
The central bank lowered its benchmark refinancing rate by half a percentage point to 10.0 percent, effective on Wednesday. It was the sharpest cut since a half-point reduction in April; cuts since then, including the last reduction two weeks ago, had been only a quarter-point.
This week's cut brings the refinancing rate, used as a benchmark for interbank lending, down by a total of 3 percentage points this year, to a level which many analysts had initially expected to see only at the end of 2009.
The central bank said in a statement that rate cuts were needed as industrial output fell month-on-month in August, its first monthly drop in three months. [ID:nLAG003752]
"Although previous central bank refinancing rate cuts have resulted in lower interbank lending rates, lending rates to the real sector of the economy remain relatively high," it said. "Total credit to the real economy in September has practically not changed."
Russia suffered a disastrous first half of the year, when gross domestic product shrank by a tenth. There have been signs of recovery since the summer, but easing inflationary pressure has enabled the central bank to continue loosening policy.
Prices have remained stable in the past two months, leaving the annualised inflation rate at 11.2 percent, the central bank's first deputy chairman Alexei Ulyukayev told an investment conference organised by VTB Capital on Tuesday.
"We do not exclude the possibility of further rate cuts, and we see the economic environment as positive for rate cuts rather than negative," Ulyukayev said.
PUTIN
Prime Minister Vladimir Putin said there were reasons for "cautious optimism" towards Russia's recovery, but he urged policymakers to ensure the recovery was balanced.
"What is important is not the speed of the recovery but its quality," Putin said, adding that economic rescue measures should focus on the automaking, machine building and house building industries.
His comments appeared to address concern that rebounding growth in Russia could prompt a fresh flood of funds into its volatile financial markets, without doing much to strengthen the real economy or lay a foundation for long-term prosperity.
Yaroslav Lissovolik, head of research at Deutsche Bank in Moscow, said the central bank was likely to announce perhaps two more interest rate cuts by the end of December, bringing the refinancing rate down to 9.50 percent.
"They are seen as being conducive to resumption in lending," Lissovolik said.
INFLATION TARGETING, FREE FLOAT
Ulyukayev also said on Tuesday that the central bank's success in controlling inflation this year might enable it to complete a move to basing its policy on inflation-targeting and a free float of the rouble by the end of 2012.
"The main direction is free exchange rate formation, and a move to inflation-targeting," Ulyukayev said. Currently, the central bank's main goal under the constitution is protecting the rouble and guaranteeing its stability.
But Ulyukayev said that while the central bank would in the future allow greater flexibility of the rouble, for now it was worried about excessive volatility.
"There was a move towards devaluation (in the summer)...Now we are seeing a counter-move...This is what worries us, these extremes in expectations. It means it is hard for businesses to make decisions," he said. [ID:nLT523478]
He said that the central bank had bought around $1 billion in September to prevent the rouble from appreciating too fast. (Additional reporting by Yelena Fabrichnaya; Writing by Lidia Kelly and Toni Vorobyova; Editing by Stephen Nisbet and Andrew Torchia)