By Balazs Koranyi

FRANKFURT (Reuters) - The European Central Bank reinstated Greek banks' access to its cheap funding operations on Wednesday after more than a year on an emergency lifeline and said it would examine later whether to add Greek debt to its asset purchases.

The restoration is a big step toward normalizing an economy that is still in recession, weighed down by capital controls and adjustments related to Greece's third bailout since 2010, agreed last year and worth up to 86 billion euros ($97 billion).

The ECB said it "acknowledges the commitment of the Greek government to implementing the European Stability Mechanism macroeconomic adjustment program and, therefore, expects continued compliance with its conditionality".

Greek banks lost their access to the ECB's regular funding operations early last year when Athens came close to being ejected from the euro zone.

After bringing his nation back from the brink, Prime Minister Alexis Tsipras has pushed through a slew of painful measures, including a pension reform and the privatization of state assets such as ports and regional airports.

A nearly decade-long economic contraction has wiped out over a quarter of Greek GDP since its peak in 2007 and unemployment stands at around 25 percent.

The country's debt is rated "junk" by credit rating agencies, but the ECB Governing Council waived its minimum rating requirement to let banks post government-guaranteed debt as collateral in exchange for normal funding.

The move comes shortly after the euro zone's bailout fund approved the next tranche of aid to Athens and ECB President Mario Draghi praised Greek efforts.

The ECB said its Governing Council will "examine ... at a later stage" possible purchases of Greek government bonds, taking into account the progress made toward debt sustainability and other risk-management considerations.

"The reinstatement of the waiver for Greek assets by the ECB could benefit Greek core banks' net interest income by as much as around 80 million euros -- after tax at around 60 million euros -- depending on the eligibility of the Greek assets and the level of haircut imposed," Greek brokerage Euroxx said.

"This, in our view, will be essential for the reduction of Greek banks' funding costs, which along with the gradual easing of capital controls should also help the all-important return of deposits into the system," it said.

The ECB's waiver does not automatically solve Greek bank's funding problems as they will still have limited eligible collateral, so they can only switch a minor part of their 64.8 billion euros worth of Emergency Liquidity Assistance (ELA) to the ECB's regular funding operations.

Though the exact details of ELA are not published, the average interest rate charged on it is estimated to be around 1.5 percent, well above the ECB's main refinancing rate, currently set at 0 percent.

(Editing by Catherine Evans)