* Interest rates seen on hold at record lows
* Draghi expected to detail ABS, covered bond purchase plans
* ECB may need to buy lower grade ABS to make plan effective
* Rate decision at 1145 GMT, Draghi news conference 1230 GMT
By Paul Carrel
FRANKFURT, Oct 2 (Reuters) - The European Central Bank will present details on Thursday of a new asset-buying plan with which it hopes to revive the flagging euro zone economy and see off the spectre of deflation.
The ECB plans to buy asset-backed securities (ABS) - packages of reparcelled loans - with a view to spurring the market for such credit and supporting lending to the small- and mid-sized firms that form the backbone of the euro zone economy.
But for the plan to apply across the bloc, the central bank may need to buy ABS paper below the standard it usually requires for collateral offered up by those tapping its funding operations.
That prospect has already stirred controversy in Germany and elsewhere. But the weak economic outlook has convinced a majority of the ECB’s 24 Governing Council members they need to act.
Last month, the ECB said it would buy ABS and covered bonds to push money into the economy. The bank also cut interest rates to record lows and said they were at their lower bound.
No rate moves are expected on Thursday, but ECB President Mario Draghi will flesh out the asset-buying plan.
“I expect them to announce a pretty comprehensive purchase programme (for ABS and covered bonds) for the next two years, and a big number - between 200 and 300 billion euros,” said Berenberg Bank economist Christian Schulz.
A Reuters poll on Monday showed money market traders on average expect the ECB to buy a total of 200 billion euros of ABS and covered bonds over a year.
The euro zone’s problems have been on display in data this week: manufacturing growth slowed further in September, and inflation has slipped to just 0.3 percent - far lower than the ECB’s medium-term target of close to but below 2 percent.
After disappointing initial take-up of a new round of cheap ECB loans to banks, Frankfurt’s efforts to restart the ABS market have come into sharper focus.
Asset-backed securities are put together by banks pooling loans made to companies or consumers to buy homes, cars or credit cards. They are then sold on to other banks but increasingly to insurers, pension funds and now even the ECB.
Draghi has appealed to governments to back the purchase plan with guarantees for some riskier ABS tranches, a step that would add a seal of security to the market and encourage other buyers.
But France and Germany have opposed such state guarantees, in opposition that will frustrate the ECB’s efforts to grow the small market.
The programme could see the ECB buy ‘junk’-rated Greek and Cypriot bank loans, people familiar with the bank’s thinking have said. Such a step may increase the tensions between Germany and the bank.
Bundesbank chief Jens Weidmann has already opposed the ABS purchase plan. Hans-Werner Sinn, president of Germany’s Ifo economic institute, is also against the programme.
“Now the ECB is turning itself into a bad bank willing to buy junk loans from the banks to help them get through its own stress tests,” Sinn said.
“They want to buy only the top tranches but you’ll see that they will be forced into buying riskier stuff too,” he added.
The asset purchase initiative is part of Draghi’s intention, declared at last month, to pump money into the economy by expanding the ECB’s balance sheet “towards the dimensions it used to have at the beginning of 2012.”
The ECB’s balance sheet topped 3 trillion euros in March 2012, but at times in the first quarter of that year it was some 400 billion euros lower, a gap that leaves uncertainty as to exactly how much stimulus the ECB wants to deploy.
To impress markets, Draghi could make a binding commitment to expand the balance sheet to a more specific level, though that is unlikely.
However, the ECB president will need to signal that the bank is ready to do more in order to sustain a depreciation in the euro, which is trading near two-year lows, in a fall that could help lift inflation off rock-bottom levels.
A Reuters poll of analysts showed the euro will weaken further over the coming year, with the possibility of further ECB stimulus dragging down the currency.
RBS economist Richard Barwell expected Draghi to signal a “greater willingness” to embark on U.S.-style quantitative easing, which essentially means printing money to buy assets, “but I don’t think we’ll get a commitment for them to do that.” (Additional reporting by Paul Taylor; Editing by Hugh Lawson)