LONDON, March 6 (Reuters) - The European Central Bank cut interest rates again on Thursday in what is likely to be its last easy decision for a while, as trade wars and rearmament drive the continent's biggest economic policy upheaval in decades.

The euro extended its gains and was last up 0.25% at $1.0815, having traded at $1.0797 earlier EUR=EBS, while government bond yields rose.

Germany's two-year bond yield traded at 2.25%, versus 2.22% just before the decision DE2YT=RR, while Italian bond yields edged up IT2YT=RR. European stocks .STOXX extended their decline, leaving the STOXX 600 down 0.7%.

The euro and European bond yields have surged this week on strong signals that Germany is readying to ramp up spending on defence and infrastructure.

COMMENTS:

SYLVAIN BROYER, CHIEF EMEA ECONOMIST, S&P GLOBAL RATINGS:

"Will the March decision be the last rate cut in this ECB cycle? No one can say for sure, but it's not impossible. Upside risks to inflation remain, especially via wages, and if you look at the bank lending survey, the flow of new loans or the breakdown of money growth, the empirical evidence suggests that ECB rates are already no longer constraining demand. Perhaps the neutral rate is simply higher than many believe.

"How Europe will finance its defence efforts - should it be more by using the headroom in the EU budget and leveraging private savings through the EIB balance sheet, rather than by relaxing EU fiscal rules to allow governments to run higher deficits - is also important to the ECB. All these are reasons why we could see the ECB pause at its next meeting in mid-April before getting more clarity."

PATRICK O'DONNELL, SENIOR INVESTMENT STRATEGIST, OMNIS INVESTMENTS:

"The real risk for today will be in the Q&A. President Lagarde will inevitably be asked about the German fiscal package that is in the works. Whilst there may be some implementation risks, given the magnitude of what as been announced, it will be very difficult to offer a dovish interpretation."

YAEL SELFIN, CHIEF ECONOMIST, KPMG:

"Today’s decision comes amidst a significant increase in economic uncertainty, which could pose a risk to the medium-term inflation outlook. Governments across Europe have signalled their intention to loosen fiscal policy, with Germany announcing a substantial spending package for both defence and infrastructure. While this is expected to boost growth prospects in the medium term, it could potentially lead to a rebound in inflationary pressures. The prospects of trade tariffs imposed on Europe and its trading partners accentuate the upside risk."

(Reporting by the Reuters Markets Team, Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)

((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))