By Boris Groendahl and Marc Jones
VIENNA (Reuters) - The financial crisis is not over and governments have more to do to pull banks off state support, although no euro zone country should default on its debt, European Central Bank officials said on Friday.
ECB Governing Council member Ewald Nowotny told reporters at a trade union conference that government action was needed to wean banks off the emergency supply of cheap cash the bank has provided since the crisis erupted in late 2008.
That added to the impression that the fate of some euro zone banks -- particularly in Ireland and Portugal -- is now back at the forefront of investors' and policymakers' concerns, even after the agreeing of new stricter rules on capital last week.
Axel Weber, the head of Germany's Bundesbank and another ECB council member, said there was still work to be done on making sure no banks were so big they could not be allowed to fail in future and said regulation would have to renewed regularly.
"The financial crisis is still with us. We are not in year one after the crisis, we are in year four of the crisis," Weber said in a speech at the European Business School.
"Moral hazard is present in the financial system... I want to get to a situation where the term 'too big to fail does not exist'. Banks have to be able to fail, but it must be able to happen in an orderly way."
A cloudier global growth outlook has also reignited worries about the sustainability of the economic recovery.
Ireland has taken a hammering on markets -- and pushed out spreads of other countries perceived as at risk -- over the growing cost of bailing out its banks, crippled by the collapse of its property boom.
Weber said that although markets were pricing in an eventual sovereign default by Greece, none of the euro zone countries would default.
"A sovereign default in the euro zone will not happen ... A lot of money has been put on the table (by governments) but it comes with strong conditionality," Weber said.
"Greece has to stay an absolute exception," he added, referring to the huge European Union/International Monetary Fund aid package Greece received to solve its debt problems, which were covered up until earlier in the year.
Also in Vienna, the newly installed European stability fund's head Klaus Regling said it was unlikely to be used and even in such a case would only be a stop gap to allow governments breathing space to carry out reforms.
The 440 billion euro fund, laid out in early May at the height of market panic over the euro zone's debt crisis, was not a solution for embattled countries' structural problems.
"My central expectation is that the EFSF will not need to lend money," Regling told the conference.
"The EFSF can only buy time when it provides loans; the countries themselves must improve their fundamentals."
The head of the Organization for Economic Cooperation and Development, Angel Gurria, said the world economy was proving weaker than it had previously expected in the second half and countries should consider pushing back austerity measures if that weakness persists.
"We had forecast a weakening of the recovery in the second half. The question was how weak was it going to be. And I have to say I think it's been weaker than we thought," he said.
"In the short term the weakness can be dealt with (by) the prolongation of some of the monetary accommodation in some countries. But if we see that there is a permanence of the weakness perhaps then one can delay the entry into force of the measures of fiscal consolidation."
(Reporting by Marc Jones; additional reporting by Martin Santa, editing by Patrick Graham)