European Central Bank President Mario Draghi signaled he'drather use interest rates than the printing press to bolster growthas the debt crisis drags the euro-area economy towardrecession.

Chairing his first policy meeting after succeeding Jean- ClaudeTrichet on Nov. 1, Draghi unexpectedly cut the benchmark rateyesterday by a quarter point to 1.25 percent and left the door opento a further move. At the same time, he ruled out ramping up ECBbond buying to reduce governments' borrowing costs, saying theprogram is “temporary” and “limited.”

“It's back to basics on the crisis fighting; rates rather thanbond purchases,” said Julian Callow, chief European economist atBarclays Capital in London. “He must be the first ECB President toutter the word 'recession' before it has actually happened.”

As bond yields soared in Italy and Spain after euro-area leadersraised the prospect of Greece leaving the 17-nation currency bloc,Draghi said the debt crisis is damping growth and a “mildrecession” is on the cards. The central bank will lower rates againas soon as next month to fully reverse the two increases carriedout under Trichet earlier this year, economists said.

Draghi sounded more like Federal Reserve Chairman Ben S.Bernanke than Trichet, said Trevor Greetham, Director of AssetAllocation at Fidelity Worldwide Investment in London. “He put muchmore emphasis on growth. This suggests another rate cut in amonth's time.”

The euro fell after the ECB rate cut before recovering to tradelittle changed at $1.3828 at noon in Frankfurt today. Italian bondyields, which declined from euro-era records yesterday, rose today.The 10-year yield gained 5 basis points to 6.22 percent.

Draghi was under pressure to step up the ECB's bond purchases tostop the two-year-old debt crisis spreading to Italy, the region'sthird-largest economy.

Irish Finance Minister Michael Noonan called on the ECB to use a“wall of money” to halt speculation and contagion after Greece'sdecision to hold a referendum on its second bailout fueled concernsit may default on its debts.

Germany and France raised the stakes, saying they wouldinterpret it as a vote on Greece's euro membership, prompting GreekPrime Minister George Papandreou to backtrack on the plan.

“Despite the Greek shenanigans about a referendum, the marketsituation is not worrying enough for the ECB to pull out theultimate stops,” said Christian Schulz, senior economist at Joh.Berenberg Gossler & Co. in London. “The ECB is still far awayfrom forcefully intervening to protect illiquid but solventsovereigns.”

Draghi's 23-member Governing Council is already split over theECB's bond purchases, which now amount to 173.5 billion euros($239.4 billion).

The ECB says the purchases are aimed at ensuring its interestrates are transmitted in financial markets. German policy makerssay they also reduce borrowing costs for profligate governments,blurring the line between monetary and fiscal policy.

Bundesbank President Jens Weidmann opposes the program and ECBExecutive Board member Juergen Stark will step down at the end ofthe year over the issue.

Stark reiterated at an event in Frankfurt today that he is “nofan” of the bond purchases as they “set the wrong incentives.” Hedefended the rate cut, saying the economy may not grow at all inthe fourth quarter, damping price pressures.

ECB council member Yves Mersch told Luxembourg's Tageblattnewspaper late yesterday that the economy is “practically infreefall.”

German factory orders unexpectedly plunged 4.3 percent inSeptember, the country's Economy Ministry said today. A separatereport showed Europe's services and manufacturing output contractedat the fastest pace in three years in October.

“I struggle to see how in the current environment, withinflation starting to decline in the coming months and withactivity clearly weakening, asset purchases would be such a badthing,” said Jens Larsen, London-based chief European economist atRBC Capital Markets and a former Bank of England official. “Butbond purchases on a large scale seem to have basically been ruledout of the toolbox, at least for now.”

Jennifer McKeown, an economist at Capital Economics Ltd. inLondon, said lingering concerns about price stability may be onereason why the ECB doesn't engage in full-blown quantitative easinglike the Fed and the Bank of England.

Keeping inflation just below 2 percent is the ECB's primarymandate. It is currently running at 3 percent.

“A big move into QE may mean inflation rises in future,” saidMcKeown. The ECB is also “very reluctant to step in to what itconsiders to be the role of the region's governments,” she said.“It's a role for fiscal policy, not monetary policy.”

Draghi, 64, ruled out the ECB becoming “the lender of lastresort for governments” and said the responsibility for financialstability rests squarely with politicians.

“Draghi made it clear that sovereign governments must not counton external help,” said Axel Merk, chief investment officer at MerkInvestments LLC in Paolo Alto, California. “It's really verysimple: get your act together, national governments, and you'll befine. If not, you'll pay the price.”

While Group of 20 leaders meeting in Cannes, France, todayheaped pressure on Europe to solve its debt crisis, they failed toagree on increasing the resources of the International MonetaryFund so that it could provide more foreign aid.

Governments are awaiting further details of Europe's week- oldrescue package before they commit cash, German Chancellor AngelaMerkel said.

The Organization for Economic Cooperation and Development onOct. 31 forecast euro-area growth will slow to just 0.3 percentnext year while U.S. expansion accelerates to 1.8 percent.

Of 55 economists in a Bloomberg News survey, 49 predicted Draghiwould keep rates on hold at his first policy meeting to emphasizehis inflation-fighting credentials. He proved them wrong.

“Central bankers tend to do what needs to be done,” said JacquesCailloux, chief European economist at Royal Bank of Scotland GroupPlc in London. “Draghi might be reluctant to step up the bondpurchases now but if the situation deteriorates further, he willhave to.”

Bloomberg