By Luke Baker and John O'Donnell
BRUSSELS (Reuters) - The European Central Bank is under pressure to unveil new steps to stabilize the euro zone when it meets on Thursday as the bloc battles a crippling debt crisis that has stoked contagion fears in the U.S. and Asia.
An 85 billion euro ($110.7 billion) EU/IMF rescue of Ireland last weekend and public assurances from leaders that the euro will be defended at any cost have failed to impress investors who are targeting Portugal, Spain and Italy in a test of the European Union's resolve and crisis-fighting resources.
A day after investors pushed the risk premiums on Spanish and Italian bonds to euro lifetime highs, markets steadied as speculation grew the ECB could agree to step up its purchases of government debt and a U.S. official told Reuters Washington would support boosting an EU rescue facility via IMF funds.
Speaking in Brussels, European Commission President Jose Manuel Barroso said he had confidence the ECB would take whatever action was needed to protect the stability of the single currency bloc.
"I'm sure the ECB is analyzing the current situation and that it will take the decisions necessary to guarantee the financial stability of the euro zone," Barroso said.
The EU's Economic and Monetary Affairs Commissioner Olli Rehn appeared to pass the baton to the ECB, saying recent EU actions provided a sound basis for further stabilization measures by the central bank.
HIGHLY CONTROVERSIAL
The ECB launched a bond purchase program in May after Greece was bailed out, but it has been highly controversial within the bank and has been used only erratically.
Influential Bundesbank head Axel Weber has called publicly for the program to be scrapped and fellow ECB members have criticized the U.S. Federal Reserve's decision to buy $600 billion of U.S. debt in a policy known as quantitative easing.
Any sense from fiercely independent central bankers that they were being bullied by EU politicians into making bond purchases could further deepen their opposition to such a step.
With the euro under threat, however, they may decide they have no other choice.
In recent days, economists have urged the ECB to throw out its rule book and do all it can to save the euro, particularly since governments seem to be running out of ideas for restoring confidence in their monetary union.
"There is a feeling that things have got to a point where the ECB has to do more," said Gilles Moec, an economist at Deutsche Bank.
Reflecting global concern about the euro zone crisis, the U.S. Treasury announced late on Tuesday it would send an envoy to Europe this week to discuss the turmoil with governments in Berlin, Madrid and Paris.
A U.S. official told Reuters in Brussels Washington stood ready to support an expansion of the bloc's current 750 billion euro rescue mechanism via extra funds from the International Monetary Fund, a step German officials have said they oppose.
"It is up to the Europeans," the U.S. official said. "We will certainly support using the IMF in these circumstances."
The comments helped push the euro up to $1.3130 in late European trading after three successive days of losses which took it to a 10-week low against the dollar on Tuesday.
The premium investors demand to hold Portuguese, Spanish and Italian bonds instead of German benchmarks fell and European bank stocks rebounded, with Spain's Banco Santander and BBVA up more than 7 percent after the Spanish government announced new steps to reduce the national debt.
Debt auctions in Portugal and Germany, however, showed investors remain nervous. Lisbon's borrowing costs surged in a 12-month bill auction and a German five-year note sale drew the weakest demand in half a year.
Manufacturing data underscored the economic divergences plaguing Europe.
Citigroup's chief economist said this week euro zone turmoil might be the "opening act" of a global sovereign debt crisis that could infect the United States and Japan.
EU plans to make private bond holders bear some of the pain from any sovereign debt restructuring after mid-2013 have led investors to reassess the risk of putting their money in the government bonds of high-debt countries.
LIMITED OPTIONS
Strong action by the ECB is one of a small number of unattractive options for stopping the rot, given divisions among European governments over how to respond.
Germany has resisted pressure from countries such as France to turn the euro zone into a "fiscal union," a step that could help the bloc address its economic imbalances, but would require members to sacrifice sovereignty for the good of the group.
Chancellor Angela Merkel is also skeptical about putting up more funds for bailouts, concerned that German taxpayers could end up underwriting the rescues of countries her government believes have become targets because of economic mismanagement.
Pressure from Germany's partners is mounting. Portugal's Treasury Secretary Carolos Pina told Reuters the EU needed to "deepen its budget and create a European Treasury" to defend the euro, a move that would be anathema to Berlin.
(Writing by Noah Barkin; Editing by Andrew Dobbie)