* SNB's reserves watched to see whether cap on franc sustainable
* SNB has cap of 1.20/ euro on safe-haven franc * Reserves at 429.3 bln Sfr in September By Andrew Thompson and Catherine Bosley
ZURICH, Oct 5 (Reuters) - The Swiss National Bank's foreign exchange reserves barely rose in September, after surging in previous months, with analysts attributing the slowdown to a weakening of the safe-haven franc as concerns about the euro zone crisis eased.
The size of the SNB's foreign currency reserves is closely watched by the market for clues as to how long its policy of capping the franc at 1.20 per euro can be sustained. It set the cap just over a year ago to lessen the risk of deflation and recession.
Although the SNB's reserves rose in September to 73 percent of annual output, the 2 percent month-on-month increase in the reserves was far below the 20 percent jump seen in June and July.
The SNB held foreign currencies worth 429.303 billion Swiss francs last month, data on Friday calculated by the International Monetary Fund's method showed. That compared with a revised 420.797 billion francs of reserves in August.
"It is more a revaluation effect given tensions have eased and the SNB wasn't forced to buy much, while the Swiss franc depreciated against the euro," Sarasin economist Alessandro Bee said.
At times during the past year, the SNB had to intervene with huge sums to defend the franc-euro cap as investors fretting about sovereign debts in Europe bought the safe-haven franc. The franc spent months trading within sight of the 1.20 mark, and even broke through it briefly in April, as fears grew that Greece or another country might have to quit the currency bloc.
However, the European Central Bank's bond buying plan, announced last month, has helped take the edge off market jitters. The euro climbed 0.7 percent against the franc in September, its best monthly performance since November.
The SNB held 60 percent of its forex reserves in euros, 22 percent in dollars, plus smaller amounts of other currencies including yen and sterling at the end of the second quarter, the most recent allocation data available.
A spokesman for the SNB was not immediately available for comment on the reserve rise in September.
Already, in a sign of investors becoming less jittery, the amount of cash commercial banks hold with the central bank - and considered by many economists to be the best gauge of the SNB's interventions - has already started to decline.
Yet despite signs of the euro crisis becoming less severe, SNB Chairman Thomas Jordan said on Sept. 13 that the cap on the franc remained the right policy tool.
Underscoring the need for the currency cap, the Swiss economy, which long seemed immune to the woes of the euro zone, contracted in the second quarter. Leading indicators, including the ZEW investor sentiment index and the purchasing managers' index (PMI) for the industrial sector, show the economic outlook darkening.
The SNB's ballooning reserves have in the past proved fodder for criticism, particularly for the influential right-wing Swiss People's Party (SVP).
In 2010, when the SNB ran up a record 27 billion franc loss on its holdings due to its efforts to tame the franc, SVP ma stermind Ch ristoph Blocher called for then central bank chief Philipp Hildebrand to resign.
Also helping to dispel criticism, the SNB , which is a publicly held company, posted a hefty profit for the first half of the year.
(Additional reporting by Martin de Sa'Pinto and Anirban Nag in London; Editing by Susan Fenton)
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Keywords: SWISS SNB/RESERVES