ECB pays attention to good functioning of markets, Lagarde says, after France spooks investors

PARIS (Reuters) -The European Central Bank pays close attention to the smooth functioning of financial markets, ECB President Christine Lagarde said on Monday, after French President Emmanuel Macron's call for a snap parliamentary vote last week spooked investors.

Investors were demanding a 77-basis-point premium for lending to AA-rated France over triple-A Germany for 10 years in Monday morning trade, little changed from Friday after climbing 29 bps last week in its biggest weekly rise since 2011.

Asked if the spread was a concern, Lagarde told reporters at an event near Paris: "Price stability goes hand in hand with financial stability. We pay close attention to the smooth functioning of financial markets, and today we continue to do so."

Lagarde said bringing inflation down to 2% might seem a trivial task given current political ructions in Europe but that now was not the time for the ECB to lose sight of its primary objective.

"If we were to let inflation get out of hand when we're in the process of bringing it under control and when we've begun this third stage of the monetary policy process, it would be totally counterproductive," she said.

European Central Bank policymakers have no plan to discuss emergency purchases of French bonds and still think it is for French politicians to reassure investors unnerved by the prospect of a far-right government, five sources told Reuters.

(Reporting by Leigh Thomas; Editing by Richard Lough and Bernadette Baum)