WRAPUP 1-Fed, Bank of Japan officials flag deflation risks

* Fed's Bullard suggests liquidity injections to ward off deflation threat

* BOJ chief vows to watch for any signs of deflation

* ECB's Mersch plays down euro zone deflation risk

By Alister Bull and Leika Kihara

EVANSVILLE, Ind./TOKYO, Nov 21 (Reuters) - U.S. Federal Reserve and Bank of Japan officials said they were on alert for signs of deflation and grappling with how the central banks would keep it at bay as interest rates approach zero.

St Louis Federal Reserve President James Bullard said the Fed may have to resort to so-called quantitative easing that relies on massive liquidity injections into the banking system.

Bank of Japan Governor Masaaki Shirakawa said such injections had helped pull Japan out of a decade of deflation that began in late 1990s, but he would not comment on whether it be the best response to a slump sparked by the global financial crisis.

Central bankers, who only few months ago were struggling to contain an inflation flare-up stoked by soaring commodity prices, are now trying to prevent global market mayhem from degenerating into a cycle of falling prices and economic output.

Consumer demand is plummeting across the industrialised world and U.S. consumer prices fell at a record pace in October, but Bullard said deflation was still a remote risk. "It would take some doing to get some deflation," he told a regional economics conference.

"If we do our job it won't happen and we're dedicated to that."

The task of avoiding deflation has been complicated by sharp interest cuts by major central banks to avert economic collapse after a credit squeeze triggered by U.S. mortgage defaults threatened to rupture the global financial system.

The Fed's policy rate is at 1 percent and some economists believe it will drop to zero over the next three months.

"At least over the near term, any additional influence through interest rate reductions will be limited and the focus of monetary policy may turn to quantity measures," said Bullard who is not a voting member of the Fed's policy committee this year.

The Bank of Japan had resorted to hefty liquidity injections during the 1990s to spur price growth once official interest rates reached zero.

The Fed and other central banks are already flooding the banking system with cash to prod banks into lending to each other. But these funds are still lent at a cost. In Japan, during quantitative easing, banks received free cash in the hope that it would spur credit growth and consumption.

"By announcing and maintaining targets for key monetary quantities, the Fed may be able to keep inflation and inflation expectations near target and ward off either a drift toward deflation or excessively high inflation," Bullard said.