* Tucker says open to more bond purchases if needed
* But full force of existing purchases not yet felt
* Negative rates and working capital scheme also eyed
By William Schomberg and David Milliken
LONDON, Feb 26 Bank of England Deputy Governor Paul Tucker said on Tuesday he would agree to the central bank buying more government bonds if needed and that the bank was considering new ways to boost lending.
He also said the pound may need to weaken more, a comment that pushed sterling to near 2-1/2 year lows against the dollar
Tucker was among six policymakers who voted against new purchases of government bonds (gilts) this month, pitting him against Governor Mervyn King and two other officials who backed more bond buying, or quantitative easing (QE).
The split raised expectations in financial markets that the Bank of England would eventually pursue more stimulus.
"I remain open to doing more QE, depending on the outlook for demand and inflation," Tucker said in an annual report to British parliamentarians.
But Tucker also said the impact of bonds bought in the past might yet give a greater boost to Britain's economy than so far seen, as the initial effectiveness had been offset by concern about the global economy at the time.
"The existing degree of monetary easing from QE is likely to gain more traction on spending than it had last autumn, given reduced tail risks from the international environment," he said.
Britain's economy showed no growth last year and contracted in the fourth quarter, despite the central bank having spent a total of 375 billion pounds ($567 billion) on its QE bond-buying programme and with interest rates still at 0.5 percent.
When pressed by lawmakers about the possibility of more bond-buying, Tucker said the Bank of England's nine-strong Monetary Policy Committee had not written it off.
"Nobody on the committee thinks that QE has reached the end of the road and that it is not a useful instrument anymore. We stand prepared to do more, if we judge that necessary," he said.
Government bond prices were unchanged by the comments of Tucker and other Bank of England officials in parliament.
The Bank of England has signalled it will tolerate inflation remaining above its 2 percent target because it views the impact of a weaker pound and some price increases as temporary.
Tucker said it was important not to give the impression the central bank was relaxing its commitment to bringing down inflation over the medium term. "We are, in today's language, (doing) flexible inflation targeting but without ever, ever taking our eye off medium-term inflation expectations."
Tucker was considered the frontrunner to take over as the bank's next governor this year until the surprise appointment in November of Mark Carney, currently head of the Bank of Canada.
He is also seen as tolerant of inflation remaining above target and economists expect possible changes in the bank's approach to reviving growth when he takes over in July.
Tucker on Tuesday raised the possibility that the BoE could charge banks to hold their money, a move which could encourage them to lend it to companies instead, possibly boosting growth.
"I hope we will think about whether there are constraints to setting negative interest rates," he said when asked about possible new options for the bank. "This is an idea that I have raised. This would be an extraordinary thing to do and it needs to be thought through very carefully."
The central bank joined forces with Britain's government to create a new Funding for Lending scheme last year with a view to boosting lending by lowering the costs of capital for banks. But so far it has failed to have a big impact on lending to companies.
The bank's policymakers saw "drawbacks" when considering cutting interest rates to zero or below in the past but would continue to consider them along with other options, according to minutes of their February meeting published last week.
Tucker also said he was looking at how to increase smaller firms' access to working capital.
"I would simply like to explore whether or not some kind of working capital finance instrument could be rejuvenated."
Tucker added his voice to suggestions from top policymakers that the pound may need to weaken more to help British exports. "As a matter of analysis ... we believe that the real exchange rate needs to fall, compared with where it was a few years ago, to get the necessary rebalancing in the economy," he said.
The pound fell after Tucker's comment, approaching levels it touched on Monday after Britain lost its AAA rating by Moody's. The pound has been weakened recently by the growing expectations of the Bank of England printing more money.
Tucker said the benefit of a weaker pound, such as boosting exports, would vanish if inflation expectations rose too high.