* ECB to up rates by 25 or 50 bps in 1st hike since 2011
* New bond-buying tool subject to Commission's rules (Adds detail)
By Francesco Canepa and Balazs Koranyi
FRANKFURT, July 19 (Reuters) - European Central Bank policymakers are considering raising interest rates by a bigger-than-expected 50 basis points at their meeting on Thursday to tame record-high inflation, two sources with direct knowledge of the discussion told Reuters.
To cushion the impact of the higher borrowing costs, policymakers are also expected to announce a deal to help indebted countries like Italy on the bond market. The deal will require they stick to European Commission rules on reforms and budget discipline, the sources said.
The ECB is set to deliver its first rate hike in more than a decade on Thursday against a difficult economic backdrop exacerbated by the war in Ukraine. Inflation is high and rising while economic growth has slowed and a political crisis in Italy is keeping investors on edge.
That dynamic creates a balancing act for the ECB, between raising rates to curb price growth and ensuring that the most indebted of the euro zone's 19 member countries don't run into financial trouble as a result.
The sources, who spoke on condition of anonymity because the deliberations are private, said the discussion about whether to increase rates by 25 or 50 basis points was still wide open.
Other major central banks have been raising rates in bigger increments, such as 75 or even 100 basis points, raising the pressure on the ECB to do more.
But the risk of a recession in the euro zone, particularly if Russia turns off the taps to natural gas supplies, made some ECB governors more cautious about choking growth, the sources said.
An ECB spokesperson declined to comment, citing the bank's pre-meeting quiet period.
The euro jumped on Tuesday after Reuters first reported that a 50 bp hike was under discussion, and was last up 0.9% against the dollar at $1.0232. The single currency briefly fell below parity last week.
Yields on euro zone government bonds also rose, with Germany's two-year benchmark now yielding 1.329%.
The ECB said on June 9 after its last meeting that it would raise interest rates gradually, probably by 25 basis points in July with a bigger move possible in September.
But ECB chief Christine Lagarde later said there were "clearly conditions in which gradualism would not be appropriate".
Euro zone inflation hit 8.6% last month and is expected to keep rising until the autumn, driven by soaring fuel and food prices. It is then seen slowly falling back but could hold above the ECB's 2% target through 2024, raising the risk that wages will follow, setting off a hard-to-break wage-price spiral.