Aug. 27 (Bloomberg) -- European Central Bank President Jean- Claude Trichet stepped back from a plan to raise interest rates next week after a rout on financial markets.

Trichet said the bank is not ``pre-committed'' to higher borrowing costs on Sept. 6 and avoided repeating his Aug. 2 statement that the ECB was monitoring inflation with ``strong vigilance,'' a phrase used to foreshadow previous rate increases. ``What I said Aug. 2 was before market turbulences,'' Trichet said after a speech in Budapest today.

The euro and bond yields fell as some investors concluded that the ECB may keep its key refinancing rate at 4 percent next week as it gauges how much the fallout from the U.S. subprime mortgage market crisis is infecting the European economy.

``With barely 10 days to go before the monetary policy meeting, the ECB is keeping all options open,'' said Marco Annunziata, chief economist at UniCredit Markets & Investment Banking in London.

Investors also cut bets the ECB will lift borrowing costs by year-end, interest-rate futures trading shows. The implied yield on the December futures contract fell to 4.43 percent after rising to 4.48 percent ahead of Trichet's speech, near the highest in almost three weeks.

Not as Confident

The contract settles to the three-month inter-bank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999. The euro dropped as low as $1.3637 from $1.3650 before Trichet's comments.

``There is clearly a sense that the commitment to hiking is no longer there,'' said Jacques Cailloux, an economist at Royal Bank of Scotland Plc in London. ``We've got early signs that the real economy has been hit and the ECB can no longer be as confident about the outlook as it was before.''

In his first public appearance since the market rout began, Trichet said the ECB's 19-member governing council hasn't assessed the state of the economy since its Aug. 2 meeting and that all options are open when it convenes in Frankfurt.

``We will assess the risks to price stability in the medium term and we will take our decision,'' he said.

Whether Trichet, 65, follows through with his plan of early August to raise rates will depend on how successful he is in calming markets and ensuring volatility doesn't curb economic growth. The economy of the 13 nations which share the euro is already cooling, with second-quarter growth slowing more forecast. A report last week showed manufacturing and services growth slackened in August.

Banks Hurt

There is evidence that the collapse in the market for risky American home loans is hurting Europe.

BNP Paribas SA, France's biggest bank, was forced to halt withdrawals from three of its investment funds, while Landesbank Sachsen Girozentrale, the German state-owned bank, is getting emergency funding and being bought by Landesbank Baden- Wuerttemberg.

The ECB has already used several tools to smooth inter-bank lending, extending loans and adding 211.3 billion euros of extra cash to the money market between Aug. 9 and Aug. 14.

``It should be clear that the situation has deteriorated and that there's room to delay the rate increase,'' said Christoph Kind, a fund manager at Frankfurt Trust in Frankfurt. ``It would be a contribution to stability if the ECB didn't raise its key rate in September.''

Prior to the market crisis, Trichet indicated that the need to combat inflation meant the bank would be adding to its eight quarter-point rate increases since late 2005. The European economy last year grew at the fastest pace since 2000, reducing spare capacity and pushing unemployment to a record low.

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.netSimone Meier in Frankfurt at smeier@bloomberg.net

Last Updated: August 27, 2007 13:22 EDT