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FRANKFURT (Reuters) - The European Central Bank is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December with a view to begin purchases early next year, several sources familiar with the situation told Reuters.
European shares rallied on the news, led by banks and shares in peripheral countries. The euro fell more than half a cent against the dollar and credit indices tightened sharply.
Policymakers are desperate to revive the euro zone economy, which is barely growing and dogged by low inflation of 0.3 percent, far below the ECB's target of just below 2 percent.
The ECB has already carried out work on corporate bond buying, which would widen out the private-sector asset-buying program it began on Monday. It is hoping these measures will foster lending to businesses and thereby support the euro zone economy.
"The pressure in this direction is high," said one person familiar with the work inside the ECB, speaking on condition of anonymity.
An ECB spokesman, however, said of such purchases: "The Governing Council has taken no such decision."
The ECB has already cut interest rates to record lows, offered banks cheap loans and begun buying covered bonds, which are backed by high-quality assets. It also plans to start buying asset-backed securities, or bundled loans, later this year.
Stressing that the ECB alone cannot tackle the euro zone's woes, central bank president Mario Draghi has urged crisis-hit countries to get their economies into shape with reforms.
He has also made a thinly veiled appeal for Germany to embark on a round of deficit-funded investment spending. But with Germany wedded to strict budget discipline and other countries taking time to implement structural reforms, markets are looking to the ECB to do more.
The ECB's policymaking Governing Council could discuss the possibility of making corporate bond purchases at its December meeting, two of the four sources Reuters spoke to said. All four said such plans were being discussed.
The policymakers could decide at the December meeting to go ahead with the purchases, but such a step is not certain. Should the Council decide in December to proceed, the purchases on the secondary market could begin in the first quarter of 2015, one of the sources said.
The ECB will also release updated economic forecasts from its staff at the December meeting.
Draghi has heightened investors' expectations by saying the ECB's asset purchases should help expand its balance sheet back towards levels seen in early 2012, when it briefly topped 3 trillion euros. The balance sheet now stands at some 2 trillion.
Buying corporate bonds would allow the ECB to add more stimulus, taking it closer to the target without having to buy sovereign bonds -- a problem for Bundesbank chief Jens Weidmann, who opposes such purchases on the grounds that they amount to central bank financing of governments.
Draghi has also repeated that the ECB stands ready to use additional unconventional instruments, and "alter the size and / or the composition of our unconventional interventions" should it become necessary.
"This makes a lot of sense in a lot of ways," RBS economist Richard Barwell said of the news the ECB is considering corporate bond purchases.
"It fits with the notion that some people on the Council want to do more. It fits with the notion that others on the Council don't want to buy sovereign bonds. You're then just looking for Plan Bs -- and this is one," Barwell added.
The ECB began buying covered bonds on Monday, part of the private-sector asset-purchase program that will also see it buy ABS later this year.
However, there is concern at the ECB that these measures may have an insufficient impact to help support the economy.
"In the view of many Governing Council members, the economic picture has recently taken a turn for the worse," one of the sources told Reuters.
Reporting by Andreas Framke, Eva Taylor and Paul Carrel; Editing by Hugh Lawson