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The European Central Bank is facing a day of reckoning in its response to Europe’s worst recession since World War II.

After months of delay and internal debate, President Jean- Claude Trichet said yesterday the ECB will announce its decision on new policy tools next month as interest rates edge toward zero. The danger is that the economy will slip further into recession the longer the bank delays.

“By again buying time, the ECB risks falling further behind the curve,” said Carsten Brzeski, an economist at ING Groep in Brussels. “You cannot buy time forever.”

The debate on the Governing Council pivots on whether the ECB should follow the Federal Reserve and the Bank of England in buying debt securities to rescue the economy. Germany’s Axel Weber argues that the ECB must avoid cutting rates to zero and can’t take too much risk onto its balance sheet. Vice President Lucas Papademos counters that such a move could free up credit markets.

The result may be a compromise that’s already taking shape. The ECB yesterday cut its benchmark rate by less than economists had forecast, reducing it by a quarter point to 1.25 percent, and Trichet said the deposit rate has reached a floor at 0.25 percent. At the same time, he indicated the ECB may still reduce the benchmark again and said it’s looking at “optimizing what could be done and should be done to enhance credit support.”

‘Uneasy Compromise’

“The council has still not yet made up its mind on what new non-standard measures it would take,” said Julian Callow, chief European economist at Barclays Capital in London. James Nixon, an economist at Societe Generale SA and a former ECB forecaster, said the announcements had the hallmark of an “uneasy compromise between differing views.”

Trichet reiterated most of his comments after meeting euro region finance ministers in Prague today. The euro fell 0.2 percent against the dollar, slipping to $1.3433, after jumping 1.6 percent yesterday.

As the ECB ponders its next move, other central banks and governments are ramping up their response to the global recession. Leaders from the Group of 20 nations yesterday pledged more than $1 trillion in emergency aid to cushion the economic fallout low cost car insurance. Policy makers in the U.S., the U.K. and Japan have already cut rates to close to zero.

Europe’s economy is also deteriorating and may shrink as much as 4.1 percent this year, according to the Organization for Economic Cooperation and Development. Unemployment jumped to a three-year high of 8.5 percent in February.

Intentions

Possible options for the ECB include buying commercial paper and corporate debt, widening the pool of collateral accepted in market operations and offering banks loans over a longer term, said Elga Bartsch, an economist at Morgan Stanley in London.

Purchases of government debt are less likely, she said. The ECB is hemmed in by European Union rules that forbid it from buying bonds directly from governments, and any decision to buy such debt in the open market may spark political disputes.

Some economists defended Trichet’s refusal to announce non- standard measures yesterday. Stephane Deo of UBS AG said “technical issues are not to be underestimated” as the ECB grapples with a founding treaty that deprives it of a European treasury to indemnify it against losses.

Satisfied

Finance ministers today signaled they were satisfied with yesterday’s rate cut. Portugal’s Fernando Teixeira dos Santos told reporters in Prague the ECB is “making an effort” and Austria’s Josef Proell said the reduction may be “enough.”

The ECB may also surprise economists and investors who have criticized it for not going as far as the Fed and the Bank of England, said Marco Annunziata of UniCredit Group.

While the ECB “disappointed markets” yesterday, “the stage was set for a possible ‘big bang’ next month,” he said. That could include doubling the maturity of bank loans to 12 months and purchases of corporate debt.

“This could have a major market impact, lowering yields significantly and allaying concerns of a very prolonged slump in euro-zone activity,” Annunziata said. “The dire growth outlook clearly calls for further action.”

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