LUXEMBOURG, Sept 10 (Reuters) - The euro zone economy is stabilising and likely to recover gradually but in a volatile way, while persistent falls in prices are temporary, European Central Bank Governing Council member Yves Mersch said.
"Different signs of stabilisation have become apparent recently in the euro zone as well as in the rest of the world," he said in a regular report on financial stability issued on Thursday by Luxembourg's central bank, of which he is governor.
"The available indicators may show a great amount of volatility, underlining the need for great caution in their interpretation, but it seems as if the episode of sharp contraction of economic activity has come to an end," he said.
Mersch said a phase of stabilisation was taking shape and would be followed by renewed activity.
"This revival will, however, be very gradual and irregular due to the temporary nature of certain factors supporting the activity -- such as public spending -- as well as the cleaning up of balance sheets in the euro zone and elsewhere," he said.
The ECB kept interest rates unchanged last Thursday at a record low of 1.0 percent, and warned that now was not the time to withdraw support as economies emerged slowly from recession.
The central bank's president, Jean-Claude Trichet, said the 16-country euro zone faced a very gradual recovery and that it was too early to end exceptional ECB measures to boost the economy.
ECB staff also raised their estimates for euro zone economic output this year and next, and pushed up inflation estimates.
"The phenomenon of disinflation is ... purely temporary," Mersch said, adding that inflation would turn slightly positive again in the coming months.
"Moreover, conditions have combined to allow the ECB's objective of stable prices over the medium-term horizon to be fully respected, as indicated for example by the indicators of inflationary expectations," Mersch continued.
