By Brian Blackstone and Todd Buell 

FRANKFURT--European Central Bank President Mario Draghi sent a strong signal Thursday that the bank is prepared to expand its already massive bond-buying program, underscoring an increasing divergence in the monetary policies of the world's largest central banks.

While the ECB opens the door to further expansive policy, economists widely expect the U.S. Federal Reserve to start tightening this year, possibly as soon as mid-September. The Bank of England could follow early in 2016.

Meanwhile, the Bank of Japan, like the ECB, is buying large amounts of assets, mostly government bonds, although additional easing appears unlikely for now. Sweden's central bank also signaled Thursday that it is ready to do more to boost inflation.

This widening gap could spur volatility in financial markets--particularly in exchange rates, which are sensitive to the path of monetary policy.

European stocks and bonds rallied on Mr. Draghi's comments and the euro tumbled 1% against the U.S. dollar. Central bank stimulus typically weakens a currency, particularly if other key banks are moving in the opposite direction.

Weaker growth in China and other emerging markets is dragging on the eurozone's economy, Mr. Draghi warned at a news conference on Thursday.

Asset purchases "are intended to run until the end of September 2016, or beyond, if necessary," he said--a statement investors and economists took as a sign that the bank could extend its more than EUR1 trillion ($1.1 trillion) bond-purchase program, known as quantitative easing, beyond its targeted end date of September 2016.

"It wouldn't take much to push them into action, clearly the concern [about too-low inflation] and the threat level is elevated," said Nick Matthews, economist at Nomura.

Central banks across the developed world face a similar challenge: Inflation rates are barely above zero and far below the 2% rate that most consider optimal.

Yet their economies are recovering at differing speeds. In the U.S. and to a lesser extent the U.K., output has recovered and unemployment has fallen, but growth remains feeble in the eurozone and uneven in Japan.

In another sign that more stimulus may be on the way, the ECB on Thursday increased the share of an individual bond issue that it can purchase to 33% from 25%.

The technical change came after a six-month review of the program--which was launched in March--and will ensure that the ECB can execute its current EUR60 billion per month bond-buying program.

"It clearly is a sign of the readiness of the Governing Council to adapt the parameters of the program to the situation," Mr. Draghi said. But the ECB didn't discuss specific steps Thursday, he said. "We aren't there yet."

The ECB held its key interest rates at record lows.

Separately, Sweden's Riksbank left interest rates and its bond purchase program unchanged but said that it "remains highly prepared to make monetary policy even more expansionary in the event of inflation prospects deteriorating."

While the ECB laid the groundwork for more stimulus, Federal Reserve officials are embroiled in a debate about whether to nudge short-term U.S. rates higher for the first time in nearly a decade.

Fed officials have been signaling for months that they are inclined to raise their target interest rate from near zero this year as the U.S. labor market improves and underutilized resources in the economy get soaked up.

They have been given pause of late, however, by turbulence in financial markets and China's hard-to-understand economic slowdown. The Fed's next policy meeting is Sept. 16-17 and officials have been divided about whether to act on rates then or wait until they have a better view on how markets and China might change the U.S. outlook. A U.S. jobs report to be released by the Labor Department on Friday could help shape their decision.

Meanwhile, Bank of England Gov. Mark Carney signaled in a speech Saturday that the U.K. remains on course to begin slowly raising interest rates early next year despite recent turmoil in global financial markets.

"The big question about the U.S. is why the hell wages and inflation aren't going up," said Charles Wyplosz, professor at The Graduate Institute in Geneva. However, "nobody doubts that (inflation) will be rising...Soon the same questions will be arising in the U.K."

In contrast, the eurozone has struggled to recover from a pair of recessions since 2008 and unemployment is nearly 11%, more than twice the U.S. rate. With the economy still operating far below its potential, the lack of inflation appears more deeply rooted in the eurozone. "The eurozone is four or five years behind the U.K. and U.S.," said Mr. Wyplosz.

The most recent data, published Monday, showed annual inflation in the currency bloc at only 0.2% in August. That persistently low level has raised fears of actual deflation, a prolonged period of falling prices that leads businesses and households to hold back on spending in the expectation of better deals in the future, thus stunting economic growth.

The ECB's staff economists cut their forecasts for inflation and economic growth through 2017, and--importantly--those projections didn't take into account market turbulence in late August.

"We had a worsening of the situation in several emerging market economies, and it's unlikely these challenges are going to be quickly reversed," Mr. Draghi said. "Secondly, we had a tightening of financial conditions across the board. We'll have to see whether this is short-term volatility, or is permanent."

Mr. Draghi said he expects Chinese officials to provide more details of their plans for tackling the economic slowdown and stock market falls during meetings this weekend of finance ministers and central bank chiefs from the Group of 20 largest economies in Ankara, Turkey.

"That is going to be one of the major themes," he said. "We do expect to have much more visibility in the coming days than we do now."

Paul Hannon and Jon Hilsenrath contributed to this article.

Write to Brian Blackstone at brian.blackstone@wsj.com and Todd Buell at todd.buell@wsj.com

(END) Dow Jones Newswires

September 03, 2015 16:30 ET (20:30 GMT)