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CEE MARKETS 2-Crown falls on prospect of c.bank intervention

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* Czech c.bank governor says bank would intervene if needed

* Polish five-year bond yields at record low

* Hungary inflation rate hits highest since July 2008

* Spain, euro zone worries weigh on emerging Europe assets

By Jason Hovet

PRAGUE, Oct 11 (Reuters) - The crown led losses in emergingEurope on Thursday after the Czech central bank governor saidpolicymakers stood ready to intervene to weaken the currency ifneeded.

Expectations of interest rate cuts sent the yield onfive-year Polish bonds hit an all-time low, but worries over theeuro zone dampened appetite for central European currenciesafter Standard & Poor's cut Spain's credit rating to just abovejunk.

Czech central bank chief Miroslav Singer said the bank couldact against the strong crown if there was a risk of long-termdeflation pressures, following up on comments he made last monthwhen the bank cut interest rates to near zero.

The crown

fell as much as half a percent and wasbid 0.2 percent lower at 24.95 to the euro at 0948 GMT, wipingout gains it made in the previous session. Other currencies inthe region were a touch lower.

"Singer's comments are behind (the weakening). There isnothing new and nothing too exciting, but some people are stillprobably expecting interventions soon," a Prague dealer said.

"The comments are pointing out that they don't want to acthere (at this level) and that there is no consensus in the boardon when and where to act."

Minutes from the central bank's Sept. 27 meeting, releasedlast week, showed that the governing board was still dividedover whether to intervene against the crown and employ moremonetary easing to prop up the recession-hit economy.

Years of austerity are taking a toll on the Czech economyand other economies in the region are also fighting to get outof or avoid recession. The export-driven region is also nowstruggling with slowing trade with the euro zone, whose debtcrisis is in a third year.

RATE CUTS AHEAD?

Expectations of lower interest rates in Hungary and Polandare pointing to weaker currencies in the region and bond yieldsare near record lows in Poland and the Czech Republic.

Polish bond yields fell by as much as 7 basis points, withfive-year yields at an all-time low of 4.1 percent and the10-year bond at 4.57 percent, its lowest since 2005.

The zloty

was 0.1 percent lower around 4.1 to theeuro. Prime Minister Donald Tusk talked down the currency onWednesday, saying a rate of 4.5 would be good for Poland and itsexporters.

Markets will focus on a speech by Tusk on Friday, when he isexpected to announce some measures to try to stimulate growth,as well as limited reforms aimed at making public finances morestreamlined.

"Foreign investors simply know that our economy is slowing,incoming data are weaker and weaker, so interest rates willsimply have to come down," said one Warsaw-based fixed-incomedealer.

The forint

shrugged off data showing the headlineHungarian inflation rate jumped to 6.6 percent, the highest inover four years, and was steady on the day. Hungary has cut itsinterest rates, the highest in the European Union, for the pasttwo months in a row.

It sold nearly 1.5 times as much 12-month paper asoriginally planned and average yields fell 23 basis points fromthe previous auction two weeks ago. Yields on the secondarymarket also fell, and the government plans to launch a newthree-year euro-denominated bond.

Budapest, which is still wrangling with the InternationalMonetary Fund over a financing deal analysts say is needed tobring its borrowing costs back down to manageable levels, hasnot tapped international markets so far this year.

"Regardless of the high inflation data, which surpassedalready high market projections, expectations for interest ratecuts have not diminished," said a Budapest fixed income trader.

"If Hungary wants, it can come out with a euro bond, and ifstorm clouds are gathering, there is still the IMF as analternative."

Romania's leu

fell 0.2 percent and Bucharest

stocks were dragged down by Fondul Proprietatea

,

which lost more than 3 percent due to a court ruling whichraised doubts over management of the fund.

--------------------------MARKET SNAPSHOT--------------------

Currency Latest Previous Local Localclose currency currencychange changetoday in 2012Czech crown

24.95 24.908 -0.17% +2.38%

Polish zloty

4.098 4.095 -0.07% +8.95%

Hungarian forint

282.24 282.35 +0.04% +11.47%

Croatian kuna

7.513 7.469 -0.59% +0.04%

Romanian leu4.57 4.56 -0.22% -5.45%Serbian dinar114.14 113.6 -0.47% -6.3%Yield SpreadsCzech treasury bonds2-yr T-bond CZ2YT=RR -13 basis points to 32bps over bmk*7-yr T-bond CZ6YT=RR -3 basis points to +70bps over bmk*10-yr T-bond CZ10YT=RR 0 basis points to +81bps over bmk*Polish treasury bonds2-yr T-bond PL2YT=RR 0 basis points to +394bps over bmk*5-yr T-bond PL5YT=RR -3 basis points to +359bps over bmk*10-yr T-bond PL10YT=RR -3 basis points to +310bps over bmk*Hungarian treasury bonds3-yr T-bond HU3YT=RR +1 basis points to +639bps over bmk*5-yr T-bond HU5YT=RR +3 basis points to +613bps over bmk*

10-yr T-bond HU10YT=RR +4 basis points to +561bps over bmk*

*Benchmark is German bond equivalent.

All data taken from Reuters at 1148 CET.

Currency percent change calculated from the daily domestic

close at 1600 GMT.

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(Reporting by Reuters bureaus)

((sam.cage@thomsonreuters.com)(+40)(0)(21 305 5266)(ReutersMessaging: sam.cage.thomsonreuters.com@reuters.net))

Keywords: MARKETS EASTEUROPE/