* Central bank will start chanelling EU funds to the market
* Bank sector stable despite forint depreciation
* Lasting forint weakness would pose threat to CPI goal
(Adds detail, comment)
By Krisztina Than and Sandor Peto
BUDAPEST, March 8 (Reuters) - Hungary's central bank said the forint's depreciation in recent weeks was not justified by fundamentals and it was ready to use its entire monetary policy tool kit to normalise markets.
The statement, issued by the rate setting Monetary Council after it held a non-regular meeting on Sunday, has been the strongest move by the bank so far to prop up the forint which hit an all-time low against the euro
"To this end, the bank aims to encourage a greater use of recently introduced forint and FX market liquidity tools, will start chanelling EU funds to the market, and stands ready to use its entire monetary policy tool set," the Council said.
The Council held two non-regular meetings over the weekend, one late on Friday and another on Sunday. NBH Governor Andras Simor disrupted his holiday to take part in the meetings.
The forint has led steep losses posted by central European currencies this year.
Some investors made bets against the forint in the past weeks, using the Czech crown and the Polish zloty, currencies of economies viewed as having stronger fundamentals and less reliance on foreign financing than Hungary.
The Council said the Hungarian banking sector was stable despite the forint's recent weakening, but the pressure on the forint was damaging to the capital position of the bank system in the medium term.
It also said Hungary's financing need would likely drop due to rising domestic savings, tight fiscal policy and an improvement in the country's external balance.
Hungary secured a $25.1 billion rescue loan from the International Monetary Fund, the EU and the World Bank last October and these funds will help the country finance its debt this year.
The central bank said western parent banks continued to finance their Hungarian subsidiaries which was also helping reduce reliance on international capital market financing.
THREAT TO INFLATION TARGET
The Council also said if the forint's weakness was long-lasting, it would pose a threat to the bank's 3 percent medium-term inflation target.
The central bank said its Monetary Council would do everything it could to make developments on financial markets move in line with the real economy's prospects.
Analysts welcomed the bank's move saying it came at an important psychological moment as the forint had weakened to a level that triggered concern in the wider population.
Hungarian households and companies are heavily indebted in foreign currencies, mainly euros and Swiss francs and the forint's depreciation threatens a rise in defaults.
"It's good that they have done something, putting big amounts of EU funds (euros) into the market, that's a strong move," said Janos Samu, analyst at Concorde.
"This is a strong verbal intervention and a signal that they could use all their tools. An interest rate hike cannot be ruled out, though it's questionable how effective it could be," said Orsolya Nyeste at Erste Bank.
The central bank's key base rate stands at 9.5 percent