The European Central Bank acted on Thursday to calm euro zone markets and throw a lifeline to Italy and Spain by announcing new steps to keep banks supplied with unlimited, longer-term funds and signalling it was buying government bonds.

ECB President Jean-Claude Trichet said the central bank''s programme of buying government bonds, inactive since March, was ongoing. Traders said they saw the ECB enter the market as Trichet spoke.

Trichet said the central bank would conduct a special six-month liquidity operation and keep providing unlimited short-term funds to banks at least until next January.

Many banks in Greece, Portugal and Ireland remain totally shut out of market funding and some Spanish and Italian lenders are also dependent on ECB funds. The European Commission meanwhile urged euro zone leaders to consider increasing the size of their financial rescue fund to prevent the bloc''s sovereign debt crisis from continuing to spread like wildfire.

"I... urge a rapid re-assessment of all elements related to the EFSF, and concomitantly the ESM, in order to ensure that they are equipped with the means for dealing with contagious risk," Commission President Jose Manuel Barroso said in letter to EU leaders.

EU paymaster Germany rebuffed the call in a swift response. A finance ministry spokesman said it was unclear how re-opening the debate about financial backstops so soon after last month''s emergency summit could help calm markets.

The European Financial Stability Facility, which has bailed out Ireland and Portugal and will run a planned second package for Greece, has a maximum capacity of 440 billion euros. It will be replaced in 2013 by a 500 billion euro permanent European Stability Mechanism.

The 17 euro zone leaders left the size unchanged when they agreed on July 21 to widen the funds'' role to buying bonds in the secondary market and providing precautionary credit lines to states under pressure on credit markets.

Market analysts and economists say the EFSF would need to be at least doubled and perhaps trebled to pre-empt attacks on larger economies such as Italy and Spain.

Italian and Spanish bond yields fell from 14-year highs as markets anticipated possible ECB action. Spain sold 3.3 billion euros ($3.14 billion) in short-term bonds but had to pay a sharply higher borrowing cost.