ECB takes first step towards exit

Trichet said caution was needed on the economic outlook but said growth rates could turn positive before the end of the year and hinted at room to revise up previous forecasts.

"The latest information continues to signal an improvement in economic activity in the second half of this year," he said.

"The Governing Council expects the euro economy in 2010 to recover at a gradual pace, recognising that the outlook remains subject to high uncertainty."

The European Commission on Tuesday revised up its growth forecast for next year to 0.7 percent and sees an acceleration to 1.5 percent in 2011, after a 4.0 percent fall this year.

Euro zone manufacturing activity grew in October for the first time in 17 months and its service sector expanded at its fastest in nearly two years. All this has boosted expectations that the 16-nation bloc returned to growth in the third quarter.

Inflation remained negative in October, at -0.1 percent, but Trichet said this was expected to turn positive in coming months and remain moderately positive over the policy-relevant horizon.

Many politicians see a threat to the recovery in the strength of the euro, which has risen 16 percent against the dollar in the last eight months and about 3.5 percent using the ECB's preferred trade-weighted measure.

Trichet stuck to the Group of Seven line on currency moves, saying excessive volatility had adverse implications and urging China and other emerging Asian nations to allow their currencies to appreciate.

(Writing by Krista Hughes, editing by Mike Peacock and Andy Bruce)