UPDATE 1-Colombia holds rate as weighs euro zone risk

(Adds central bank, analyst comment)

BOGOTA, June 29 (Reuters) - Colombia's central bank left its benchmark interest rate steady for the fourth straight month on Friday as it sought to gauge the impact of Europe's debt crisis on the local economy where inflation remains under control.

The seven-member board, led by Jose Dario Uribe, held the overnight rate at 5.25 percent, meeting the expectations of all 30 analysts surveyed in a Reuters poll.

At least one policymaker and business leaders have indicated in recent weeks they want a cut in borrowing costs, which would bring the country more in line with other emerging markets.

As European leaders seek ways to contain the region's debt crisis, Colombia is concerned a strong recession in the euro zone could crimp domestic growth as oil and coal prices fall.

"In Europe, several indicators suggest that the euro zone economy is contracting. The problems in the region have affected the prospects of the global economy," the bank said in a statement following the decision. "The effects of a weaker global economy on the Colombian economy have been felt through reduced demand and lower prices for our exports."

The rate decision balanced slowing growth in the domestic economy with accelerated bank lending that has worried the board in the past few months.

"This is the right (rate) level for the demands of the economy," said Julian Marquez, an economist with Interbolsa, Colombia's biggest brokerage, who expects the rate to remain steady through the rest of the year.

"Cutting the rate and fueling credit growth again is not a good idea. Growth is good considering the external situation and the fact that last year we were in danger of overheating."

Policymakers raised the lending rate 225 basis points over the past year until its first pause in March in a bid to rein in borrowing.

Colombia's economy grew a brisk 5.9 percent in 2011 as a decade-long military offensive against guerrilla groups and paramilitaries brought in a flood of foreign direct investment to Latin America's fourth biggest economy.

The economy expanded 0.3 percent in the first quarter versus the previous three months - its slowest in more than a year.

Inflows of foreign investment have helped boost the value of the currency 8.6 percent so far this year, causing concern from exporters who earn in dollars but pay costs in pesos.

President Juan Manuel Santos, whose approval rating dropped double digits in June, met this week with the bank's board and urged it to intervene more "aggressively" in the currency market to bring the peso closer to 2,000 per dollar from 1,787.5 now.

The bank is buying at least $20 million daily in the spot market to weaken the peso.

(Reporting by Helen Murphy; Editing by Andrew Hay)