By Sakari Suoninen and Eva Kuehnen

FRANKFURT | Thu Aug 2, 2012 11:50am EDT

(Reuters) - With its key German member dissenting, the European Central Bank took a heavily conditioned step on Thursday towards a new round of bond buying to drag down Spanish and Italian borrowing costs, but said euro zone governments must act first.

ECB President Mario Draghi indicated any intervention would come at the earliest in September once governments had activated their rescue funds to buy bonds, and the countries at risk had requested assistance and accepted tough conditions.

The absence of immediate action, the conditional nature of Thursday's decision and the reservations of Jens Weidmann, head of Germany's influential Bundesbank, the ECB's biggest shareholder, spooked investors.

Shares and the euro fell and Spanish and Italian yields rose, with Spain's 10-year bond surpassing the 7 percent danger level.

"The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective," Draghi told a news conference after the central bank's monthly meeting.

The ECB would also consider other "non-standard" measures to rein in the euro zone crisis, he said, hinting it might move to quantitative easing - or printing money - by not withdrawing all the money it creates to buy bonds.

Unlike the U.S. Federal Reserve and the Bank of England, which have engaged in QE since 2008 by creating money to buy securities, the ECB has so far "sterilized" all its purchases by taking in an equivalent amount in interest-bearing deposits.

The ECB kept euro zone interest rates at a record low 0.75 percent, but Draghi said the council did consider a further rate cut on Thursday amid heightened economic uncertainty.

The bank has already spent 210 billion euros buying bonds under its now dormant Securities Markets Programme (SMP) since May 2010, with limited effect, but Draghi said the new effort would be different in scope and conditionality.

Any new ECB action would be focused on shorter-term debt and was conditional on euro zone governments using their bailout funds first, and on beneficiaries accepting "conditionality".

"Governments must stand ready to activate the ESM/EFSF in the bond market when exceptional financial market circumstances and risks to financial stability exist," he said.

Italian Prime Minister Mario Monti said after meeting his Spanish counterpart Mariano Rajoy in Madrid that Draghi's statement showed "several steps forward", but any consideration of Italyapplying for EU help to lower yields was premature. He said Rome had no such intention at this moment.

Rajoy called the ECB decisions positive but gave no indication of whether Spain was willing to request an assistance programme, which he has so far resisted.

INTENSE PRESSURE

Draghi was under intense pressure from investors, European leaders and even the United States to deliver on last week's pledge to do whatever it takes to preserve the euro by bringing high borrowing costs down.

The Washington-based International Monetary Fund said it welcomed the ECB's willingness to act.

"As we have also emphasized, monetary policy alone cannot solve the problems facing the euro area. But further monetary easing and unconventional support would ease tensions as other policies are implemented and take effect," an IMF official said.

The ECB chief repeated that the euro was "irrevocable" and warned markets it was pointless to bet against or short the 17-nation single European currency. He also said the central bank was determined to counter any risk of "convertibility" - code for a possible break-up of the euro.

But analysts were underwhelmed by his announcement of possible future, conditional action.

"It is quite disappointing ... There is a lack of any action so he has basically passed the buck back on to politicians," said Ioan Smith, strategist at Knight Capital.

Marc Ostwald, strategist at Monument Securities, said: "Unsurprisingly Draghi has attempted to deploy semantics to cover up for another case of 'all talk and no trousers or action", above all in promising 'action' going forward.

"The perversion of language that is implicit in 'voting was unanimous with one reservation' should be obvious, akin to an Olympic athlete saying I won gold except that one person beat me!"

The outcome of Thursday's ECB meeting mirrored Wednesday's U.S. Federal Reserve policy-setting meeting, which also dashed expectations of immediate new measures to revive the economy.

The Fed stopped short of offering new monetary stimulus, though it signaled more strongly that further bond buying could be in store to help a U.S. economic recovery that it said had lost momentum this year.

ECB action is hamstrung by European treaty rules forbidding it from financing governments. Draghi said an ECB legal opinion had ruled out another possible "big bazooka" - giving the ESM bailout fund the right to tap ECB funds to boost its firepower.

The ECB also has to find a way to get any measures past Germany, the euro zone's largest economy and its principal paymaster. The Bundesbank issues regular reminders of inflationary dangers stemming from non-standard measures such as bond purchases and the limits central banks face.

Draghi said all members of the Governing Council endorsed Thursday's statement with one exception and he took the unusual step of mentioning Weidmann by name as the dissenter, suggesting he was prepared to outvote the German if necessary.

"It's clear and it's known that (Germany's) Bundesbank have their reservations about the programme of buying bonds. The idea is we now have the guidance, the monetary policy committee, the risk committee and the markets committee will work on this guidance and then (we) will take a final decision and the votes will be counted."

Council members who have voted with Weidmann in the past, such as the Dutch and Luxembourg central bank chief and the German member of the ECB's executive board, did not side with him this time, suggesting the Bundesbank chief was isolated.
But his acquiescence in ECB policy is widely seen as vital to preserve public support for the euro zone in Germany.

Significantly, the German government endorsed Draghi's statement

(Reporting by Sakari Suoninen; Editing by Paul Taylor/Jeremy Gaunt)