FRANKFURT (Reuters (LSE: TRIL.L - news) ) - European Central Bank President Jean-Claude Trichet said the ECB has no bias on future policy moves after it raised interest rates for the first time in over a year on Thursday, taking them to 4.25 percent from 4.0 percent.

"The monetary policy after today's decision will contribute to achieving our objective of price stability," he told a news conference. "Starting from here I have no bias. You know of course our constant position which is part of our monetary policy handling -- we have no pre-commitment on the medium term."

Trichet did not use either of the phrases "heightened alertness" or "strong vigilance" which have heralded past rate increases, though he cautioned against drawing conclusions from this. "The fact that we have not mentioned heightened alertness nor strong vigilance doesn't mean anything," he said.

Against a backdrop of inflation running at more than double the ECB's medium-term target, it had been widely expected to raise rates. But markets interpreted Trichet's remarks as softer on the possibility of future rate rises than they had expected.

The euro fell versus the dollar and short-dated Bund yields tumbled after markets 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.

The ECB acted after euro zone inflation accelerated to 4.0 percent year-on-year last month.

"This (rate) move is largely a symbolic gesture aimed at getting inflation expectations down," said Dario Perkins, European economist at ABN Amro (Amsterdam: ABAGB.AS - news) .

"I get the feeling that markets are starting to question the inflation credibility of the (U.S.) Federal Reserve and the Bank of England. The signal the ECB are sending today is that they are serious about their anti-inflation mandate," he added.

Most economists 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.

STAGFLATION WORRIES

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 have a care for growth.

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 -- and one which would complicate ECB policy.

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.

But inflation in the 15-nation region accelerated to a new high of 4 percent in June, oil prices hit a record above $145 per barrel on Thursday and rising inflation expectations underline the ECB's fear of a damaging wage-price spiral.

Consumer inflation expectations are at their highest since December 2001, just before the introduction of euro notes and coins, and index-linked bond yields are also up.

All but four of 81 economists in a Reuters poll had expected a rate rise on Thursday.

Sweden's central bank raised interest rates by 25 basis points to 4.5 percent on Thursday, the second rise this year to tackle inflation in an economy which has been relatively little affected by global credit turmoil.

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