FRANKFURT (Reuters) - The European Central Bank left interest rates unchanged yesterday, but its president Jean-Claude Trichet said policy is certainly not neutral and the ECB is ready to take pre-emptive action against inflation if needed.

The ECB's Governing Council was totally alert on inflation risks and discussed raising rates from 4.0 percent yesterday, while the option of a cut was not part of the debate, Trichet told a news conference.

In a strong warning to unions, governments and firms embarking on a new round of wage negotiations, he said it was "imperative" to avoid current high inflation rates sparking a wage-price spiral.

"This is absolutely essential," he said. "Our message is you have to know that we will not tolerate the start to the second-round effects."

Euro zone interest rates have been on hold for the last seven months after financial market turmoil forced the ECB to put on hold a tightening cycle begun in late 2005.

Other major central banks have begun cutting rates in the wake of the credit crunch, but Trichet made it clear the ECB was not considering following suit, for now at least.

Asked whether it was correct to say the ECB had a bias to tighten rates, he said: "We are certainly not neutral," adding that the comment was a good interpretation of his message.

Trichet's tough talk pushed the euro to a fresh record high against sterling and higher against the dollar and yen, as traders factored in the chance of tighter policy.

Analysts were sceptical though that the ECB would be able to follow through on its threats, given continuing downside risks to growth in the region, newly expanded to 15 countries including Malta and Cyprus since January 1.

But the median expectation of economists is still for rates to stay on hold through 2008, with the ECB seen refraining from following the US Federal Reserve, Bank of Canada and the Bank of England on their downward path, although the latter kept rates on hold yesterday as well.

"We still expect the refi rate to be kept at four percent throughout 2008," said Stuart Bennett, senior FX strategist at Calyon Credit Agricole CIB. "As long as European workers do not push for inflation-busting wage rises, the ECB should happily maintain the status quo on policy and rely on the prospect of more easing from the Fed to keep the global and European economy on track."

Trichet described the decision as a consensus, as he did last month when some policymakers also argued for a rise, but he declined to say whether the level of support for higher rates had increased since then.

Economists noted a sharper tone from Trichet on inflation risks and wage demands, when he said the ECB was monitoring wage negotiations with "particular attention."

He also said the ECB was prepared to act "pre-emptively" to head off second-round effects as proposed to a more general comment that it "stands ready to counter upside risks" on inflation at the last meeting.