By Alexander Marrow and Elena Fabrichnaya

MOSCOW Russia effectively abandoned its budget rule on Wednesday as the central bank said it would stop conducting finance ministry foreign currency purchases from Aug. 10 until the end of the year to try and prevent the rouble from plumbing new depths.

The rouble pared losses on the news. Earlier on Wednesday it sank to its lowest for more than 16 months, past 98 to the dollar, hampered by strong demand for foreign currency and a lack of supply, with a shrinking trade surplus and widening budget deficit also hurting sentiment.

"The Bank of Russia has taken the decision not to carry out purchases of foreign currency on the domestic market from Aug. 10 until the end of 2023 as part of mirroring the finance ministry's operations, related to implementing the budget rule," the bank said in a statement.

"The decision was taken in order to reduce volatility on financial markets."

Under its budget rule, Russia sells foreign currency from its National Wealth Fund (NWF) to make up for any shortfall in revenue from oil and gas exports, or makes purchases in the event of a surplus.

The central bank conducts those operations on behalf of the finance ministry, which resumed its interventions in January after a hiatus of several months, shunning what it terms "unfriendly" Western currencies in favour of China's yuan.

Last week, the ministry said it was switching to daily foreign currency purchases of 1.8 billion roubles in August - from sales in every month so far this year - as Moscow seeks to benefit from higher oil prices.

The central bank restarted its own separate interventions this month, selling 2.3 billion roubles' worth of foreign currency a day, something it said it would continue to do.

The bank's decision means that from Thursday, daily FX sales will total 2.3 billion roubles, as opposed to net sales of 0.5 billion roubles envisaged previously.

The bank said it may defer purchases within the budget rule framework to 2024.

Promsvyazbank analysts said the move demonstrated the Bank of Russia's concern about exchange rate dynamics, but that the measures would not be enough on their own to prevent further rouble weakening.

"We may see new measures to stabilise the situation on the FX market," the analysts said.

(Reporting by Elena Fabrichnaya in Moscow and Alexander Marrow in London; additional reporting by Darya Korsunskaya; Editing by Kevin Liffey, Kirsten Donovan)