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(Adds comments from central bank head)

By Janet Guttsman

MOSCOW, Aug 24 (Reuter) - Russia promised on Thursday to hold the rouble steady until the end of the year, describing the move as a vote of confidence in a slowly recovering economy and a sign of the government's ability to keep inflation down.

Central bank and government officials, at a meeting chaired by President Boris Yeltsin, agreed to prolong a three-month rouble corridor until December 31 and hold the Russian currency between 4,300 and 4,900 to the dollar.

The rouble, which has been relatively stable for months after three difficult years when economic reforms began, traded at an unchanged rate of 4,428 to the dollar on the Moscow Interbank Currency Exchange on Thursday.

"We examined (the corridor's) effect on the economy and decided to continue it," acting central bank head Tatyana Paramonova told a news conference. "It has had the effect of psychologically lowering inflationary expectations."

Russia's economy has been showing fragile signs of growth in recent months. Gross domestic product was flat in July after a four percent rise in June, although GDP was four percent below 1994 levels in the first seven months of the year.

But traders, worried by a spiral of non-payments which has frozen trade on money and currency markets, said big problems for domestic banks would overshadow the government's pledge to keep the rouble steady for the rest of the year.

"There is no sense in looking that far ahead when it's not clear what will happen to banks tomorrow," said currency trader Yevgeny Zhabinsky from Delovaya Rossiya.

Economists and officials said the corridor, a possible step towards a fixed exchange rate, was evidence of Russia's ability to bring inflation down.

"The extension of the corridor means that the government and the central bank are sure they are strong enough not to allow any destabilisation of the financial market," President Boris Yeltsin's chief economic adviser Alexander Livshits told a news conference.

One Western economist said the central bank had adequate reserves to defend the rouble, even if it fell to the bottom of its corridor against the dollar.

"Even if the rouble falls, the central bank has enough dollars that it can intervene, and that will drain roubles from the market and cut money supply," he said. "That is good for keeping inflation down."

But the announcement that the rouble corridor had been prolonged coincided with turmoil on the Russian money market and a virtual halt to interbank rouble-dollar trade.

Overnight money market interest rates -- the rate charged by one bank lending to another for a single day -- soared as high as 1,000 percent annual, from 300 percent late on Wednesday.

Dealers said many institutions were desperate for cash, but banks were reluctant to lend because they were afraid they would not get their money back.

Paramonova said the central bank would not intervene to help commercial banks caught in the credit crunch.

She said some banks had dug themselves into holes in the past by buying too many dollars and getting stuck without the roubles they needed for current payments.

"For the past years, banks have had a nice situation. Now it's time for them to change their approach," she told a news conference. "I have asked banks to understand the situation we are in better."-Reuter