FRANKFURT (Reuters (LSE: TRIL.L - news) ) - The European Central Bank raised interest rates to their highest level in nearly seven years on Thursday, but dimmed the prospect of further moves, as euro zone growth looks set to falter despite soaring inflation.

After the ECB raised rates to 4.25 percent from 4 percent in a widely expected move, Trichet said this was needed to help get record euro zone inflation back under control.

"The monetary policy after today's decision will contribute to achieving our objective of price stability," he told a news conference, describing the decision has unanimous unlike last month's three-way split.

But Trichet evinced no desire on the part of the Governing Council to change monetary policy again soon.

"Starting from here I have no bias. You know of course our constant position which is part of our monetary policy -- we have no pre-commitment on the medium term."

The euro weakened against the U.S. dollar <EUR=> after Trichet's comments dampened markets' earlier expectations of another rate rise this year, and fewer economists forecast rates would hit 4.5 percent in a Reuters poll after Trichet spoke.

Nonetheless, trade unions strongly criticised even the one rate rise.

"The ECB's decision is dangerous, counterproductive and not necessary. It's the European economy and European workers that risk paying the price for this," the European Trade Union Confederation said in a statement.

The Organisation for Economic Cooperation and Development, which conducts economic research for industrialised economies, welcomed the decision, however, and said it was inevitable given inflation pressure in the euro zone.

The ECB's main role is to keep inflation below 2 percent over the medium run, and consumer prices are currently rising at an annual 4 percent, the fastest pace since the euro's launch.

But unions and many economists believe the ECB has overestimated the strength of the euro zone economy in the face of a potential U.S. recession, sliding property prices in some parts of the bloc and unresolved bank funding problems.

A senior economic adviser to the German government, Bert Ruerup, told German newspaper Tagesspiegel that it was doubtful if a rate rise was the right response to inflation caused by soaring food and fuel costs rather than an overheating economy.

Trichet warned that after a better-than-expected first quarter, growth later this year would be weaker, although economic fundamentals were still strong.

"The second quarter will be very different from the first quarter (and) I do not feel that the third quarter will be particularly flattering," he said.

The ECB also trimmed its outlook for inflation, saying inflation was expected to remain "well above 2 percent" for quite some time, from "above 3 percent" in the June statement.

But yields on inflation-linked bonds show investors are sceptical that the hike will control inflation. The break-even rate for the French index-linked OATei <FR0010135525=>, maturing in 2015, rose to 2.75 percent after the decision, the highest since the bond was launched in 2004.

INFLATION WORRIES

Trichet warned workers and businesses against factoring high inflation into future wage and pricing contracts, and insisted the ECB would do its best to ensure the effect of rising food and fuel prices was temporary.

"We very solemnly tell them that they can count on us to guarantee price stability in the medium term," he said. "We will continue to monitor very closely all developments over the period ahead."

Trichet did not re-use last month's phrase of "heightened alertness" -- which analysts viewed as a new 'code word' to signal an upcoming rate hike -- or revive an old one, vigilance, though he tried to play down the significance of such language.

"The fact that we have not mentioned heightened alertness or strong vigilance doesn't mean anything. We have said very clearly last time that it was possible but not certain that we would increase rates today."

Markets took this as a sign that they had overestimated the odds of a series of rate hikes after Trichet shocked them last month by saying a July rate hike was possible.

Only 11 out of 63 economists polled by Reuters after the meeting now expect rates to reach 4.5 percent or higher by the end of the year, down from 16 out of 80 of those polled on June 25.

Short-dated Bund yields tumbled and euro zone interest rate futures rose after market participants reckoned that the ECB would not raise rates again in the short term.

"He is very clearly signalling that he has no intention of tightening again: 'starting from here, I have no bias' -- you can't get clearer than that," said Westpac economist James Shugg.

"He didn't use any of the old code words for follow up rises that he would have used in the past -- like 'vigilance' or 'heightened alertness'. So it's very clear that to the extent that they precommit -- which is really only for one month ahead -- they have no intention to move again," Shugg added.

Most economists, as opposed to financial markets, had seen little further scope for tightening as the growth outlook deteriorates. But markets had been betting on rates hitting 4.5 percent by the year-end, and some traders had even seen a chance of a half percentage point move on Thursday.

In the lead-up to the decision, economic data had taken a turn for the worse and German Finance Minister Peer Steinbrueck has joined politicians from France and Spain in urging the ECB to consider the growth impact of its rate decisions.

European Union Monetary Affairs Commissioner Joaquin Almunia said that stagflation, a combination of low growth and high inflation, was an obvious risk to the European economy, although Trichet dismissed this prospect.

Updated purchasing managers' figures released on Thursday showed the euro zone services sector shrank faster than previously thought in June, in line with a fall in manufacturing activity in a similar survey.

Business and consumer confidence continues to weaken, although May retail sales data was better than expected, and money market tensions remain and European shares <.FTEU3> hit a three-year low on Thursday.

(Additional reporting by Krista Hughes, writing by David Milliken)