The eurozone economy is showing "tentative signs of stabilization" European Central Bank president Mario Draghi says.
Draghi made his comments Thursday after the bank, as expected, left its main interest rate unchanged at one per cent.
It had made two monthly quarter point reductions in October and November, in a move to stimulate borrowing and investment in the region, which many economists think is heading back to recession as a debt crisis hits business and consumer confidence.
Draghi says the bank saw "tentative signs of stabilization of activity at low levels" although the economy faced "substantial downside risks."
However, he conceded that the economy of the 330 million or so people in the 17 countries using the shared currency faces "substantial downside risks" from the debt crisis that began more than two years ago.
"It is not possible to express a judgment of confidence," he said at a news conference. He predicted the economy would recover in 2012, "albeit very gradually."
The eurozone grew by only 0.1 per cent in the third quarter and many economists predict a recession.
Draghi appeared to leave the door open for further cuts if the bank thinks they are necessary. "We never precommit," he said. "In this situation of high uncertainty, we look at all factors ... we monitor all developments and we decide."
He added that the ECB "stands ready to act if needed."
The ECB has never cut rates below 1.0 per cent in its 13-year history — not even during the global crisis that followed the collapse of U.S. bank Lehman Brothers in 2008.
"Draghi didn't rule out any further moves," said Benjamin Reitzes, senior economist at BMO Capital Markets.
The euro gained one per cent to trade at $1.28 U.S. after Draghi's comments and amid other positive signs in the European debt crisis Thursday.
Spain and Italy successfully raised nearly €22 billion ($28.7 billion Cdn) in two closely watched auctions that showed renewed investor confidence in their attempts to get a grip on their debt problems.
Spain sold nearly €10 billion ($13 billion) in three- and four year bonds with demand strong and the amount sold double the maximum sought.
Italy saw its borrowing costs drop sharply as it sold euro12 billion ($15.7 billion) in what was also its first test of market sentiment of the new year.
Both debt-laden countries have been the focus of worries they might be dragged further into the crisis threatening the 17 countries that use the euro as their currency that has already forced Greece, Ireland and Italy to seek billions in bailout money.
Meanwhile, the Greek government held crucial talks with representatives of private bondholders to reach a deal on a bond swap that would reduce the country's debt load and is an integral part of its second bailout package.
Charles Dallara, the head of the Institute of International Finance, which represents the country's private bondholders, met Prime Minister Lucas Papademos and finance chief Evangelos Venizelos.
The negotiations were to resume Friday.
"A range of issues were discussed and some key areas remain unresolved. Discussions will continue in Athens tomorrow, but time for reaching an agreement is running short," a statement from the IIF said.
"It is essential in order to finalize the voluntary (bond swap) agreement that support be given by all official parties in the days ahead."
Greece hopes to finalize the deal soon for the private creditors to take a voluntary 50 per cent reduction in the value of their Greek bond holdings.
It needs to clinch the deal before it can access any more rescue loans, which it will need to help repay €14.5 billion ($18.9 billion) in bonds on March 20.
However, there are also investors with an interest in reducing the chances of a deal.
Some hedge funds, for instance, decide to buy up bonds at cheap prices in a bet that they can turn a high profit if they get repaid in full. They may therefore work toward blocking or delaying any agreement on restructuring Greece's debt.
With files from The Associated Press
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