updated 12/2/2010 11:26:56 AM ET 2010-12-02T16:26:56

The European Central Bank stepped up efforts to contain the continent's government debt crisis, as bank president Jean-Claude Trichet announced it would prolong measures to provide ready cash to banks and steady the financial system.

Markets were initially disappointed Thursday when Trichet did not say the bank would go even further and increase its purchases of government bonds. The euro sagged almost a cent during his news conference.

But it quickly bounced back, trading higher on the day on market chatter that the bank might in fact be quietly buying bonds of financially troubled eurozone countries — despite Trichet's reticence on the issue.

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By late-afternoon London time, the euro was trading 0.2 percent higher on the day at $1.3164.

Additionally, the ten-year bonds of both Ireland and Portugal suddenly rose.

For the Portuguese government, that's a big relief as it struggles to keep borrowing costs from climbing out of reach and having to follow Greece and Ireland in seeking a bailout from its partner governments in the euro and the International Monetary Fund.

"This gave the impression of increased activity on behalf of the ECB in those markets," said Elwin de Groot, an economist at Rabobank International.

The bank, the European Union and the 16 governments that share the euro are struggling to contain a crisis caused by too much state debt in some countries. They are trying to reassure bond investors that countries will not default and keep the interest rates on their debt loads from rising so high they can no longer afford to borrow.

Governments are slashing spending and raising taxes to cut their deficits, but that has raised fears that austerity will slow growth and make debt even harder to pay.

By offering more support for the economy, Trichet has clearly changed course from last month's meeting, when he indicated Europe was doing well enough for the bank to gradually phase out its emergency liquidity measures.

Last weekend's crisis bailout of Ireland changed all that however. Now markets are worrying Portugal and even much larger Spain might join Greece and Ireland in needing a bailout.

Markets widely expected the bank would step up and do more, given the potential consequences in the peripheral countries of Greece, Ireland, Portugal and Spain. The EU's top monetary official, Olli Rehn, openly lobbied for the bank to take action.

The ECB decided that it will prolong its one-week, one-month and three-month funding operations will continue at a fixed rate and at full allotment through to the first quarter of 2011. Those operations reduce anxiety in the financial system by offering banks all the short-term credit they want at the central bank's record low rates.

Trichet indicated that those measures could be extended even further if needed and that the central bank kept its mind open to increasing its bond buying program.

"We are constantly looking at the situation of the markets and at the acute tensions," Trichet said.

Though Trichet said the bond buying program was "ongoing" and that he had never said what the limit of the program was, many in the markets had been predicting that the ECB would indicate that it was stepping up the pace.

The euro and government bonds have been buoyed over the past couple of days in hopes that more bond buying would keep government bond prices up and interest yields down.

So far, the ECB is thought to have made around euro70 billion in direct bond purchases. The policy has proved controversial and Germany's representative on the governing council Axel Weber had recently called for the program to be axed.

Unlike the Federal Reserve, the ECB's bond purchases are not considered to expand the supply of money in the economy because the central bank "sterilizes" its bond purchases — as well as putting money back into the financial system through its bond buys, the ECB takes money out elsewhere.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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