* Central bank surprises with 25 bps rate cut
* Rates at record low, on par with ECB
* Crown weakens, money market rates fall
(Refiles to correct spelling of 'signs' in lead)
By Jana Mlcochova
PRAGUE, Dec 16 (Reuters) - The Czech central bank surprised markets on Wednesday by cutting interest rates to a new record low, showing concern of protracted economic weakness despite signs of slightly higher price pressures.
Policymakers trimmed the main two-week repo rate, used to skim off excess liquidity, to 1.0 percent, bringing it in line with the euro zone's main rate and far below rates in other non-euro central European countries.
The crown weakened as much as 1 percent to 26.355 per euro following the decision but later firmed back to around 26.245, above Tuesday's closing levels. Money market rates dropped.
Analysts had said the decision would be a close call and the market had priced in a 25-50 percent chance of a cut, but most banks had forecast no change due to losses of 0.6 percent for the crown in the last month and a pick-up in inflation.
"Today's decision is a bit surprising when seen in the context of recently released data and growing risk aversion in financial markets," said Radomir Jac, chief analyst with Generali PPF Asset Management.
"Risk aversion and the possibility of a weaker crown were the key reasons for keeping interest rates on hold in November."
Analysts said rising fiscal after parliament approved extra spending for next year and uncertainty over 2011 budget ahead of election due in May also suggested caution.
The bank did note release names but confirmed market belief that the vote was narrow: 4 to 3 in favour of the move.
Vice-Governor Miroslav Singer said the bank was aware of somewhat higher inflation and currency risks for inflation, but said the cut followed the bank's quarterly inflation forecast revealed in November - although the bank did not cut back then.
"That is why the board decided, in line with the forecast, to put the rates in a direction that the forecast indicates," he said.
The forecast assumed a rate cut and saw inflation would be below the bank's 2 percent target at the end of 2010 if various one-off effects such as tax hikes are ignored.
Most economists said the move was probably the last cut in the crisis and months of stability would follow, although Singer refused to put a firm floor under the rates.
The bank also cut the Lombard rate, used for overnight lending to banks, by 25 basis points to 2.0 percent. But it left the discount rate paid to banks for overnight deposits unchanged at 0.25 percent, breaking the custom of moving all rates in sync.
Money market rates fell, with one week interbank rates down to 0.95/1.40 at 1501 GMT from 1.05/1.35 before the decision. Forward Rate Agreements, contracts betting on future changes in interest rates, eased to 1.48/1.54 from 1.62/1.67, according to Reuters data.
CROWN IN SPOTLIGHT
Dealers said the cut boosted the likelihood that the crown would be used as a funding currency of regional carry trades, which use currencies with low interest rates to invest in higher yielding ones, such as the zloty or the forint.
Analysts believe the highly open Czech economy has passed the worst in the crisis but they do not expect strong upturn.
The economy shrank at 4.1 percent in the third quarter, less than the bank forecast for a 4.9 percent contraction. It grew 0.8 percent on quarterly basis.
But shrinking household consumption and worsening labour market threatening to suppress demand supported more easing.
(Additional reporting by Robert Mueller; Editing by Patrick Graham and Victoria Main)