By Eva Kuehnen

FRANKFURT (Reuters) - The European Central Bank lowered its euro zone growth forecast after holding interest rates at record lows on Thursday, and said things would have been much worse without its dramatic action to pump a trillion euros into the banking system.

The ECB's staff forecasts showed the economy could shrink by 0.5 percent this year and at best grow by a meagre 0.3 percent, a slight downgrade of its previous estimate.

"Available survey indicators confirm signs of a stabilisation in the euro area economy. However, the economic outlook is still subject to downside risks," ECB President Mario Draghi told a news conference, after the central bank left interest rates at 1.0 percent.

Meanwhile, a recent 20 percent rise in oil prices is rekindling inflation to some extent. It is now forecast to be higher, at between 2.1 and 2.7 percent this year, above the ECB's target of close to but below two percent.

"Owing to rises in energy prices and indirect taxes, inflation rates are now likely to stay above 2 percent in 2012, with upside risks prevailing," Draghi said.

The latest Reuters poll of 74 economists suggests the ECB will hold rates at 1.0 percent until well into 2013.

German Bund futures rose while European shares and the euro trimmed gains after Draghi said growth forecasts had been cut.

"In our view, the projections are still relatively optimistic as hard data have failed to show the "stabilisation" process, especially in the (euro zone) periphery. Risks are clearly skewed to the downside," said Annalisa Piazza at Newedge Strategy.

Draghi was in no doubt that the ECB's twin three-year funding operations, which pumped over 1 trillion euros into the euro zone banking system, had saved the currency bloc from a serious crisis.

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ECB sees slower growth, flags success of money flood