* Prime minister had denounced controversial ban
* IMF says ready to assist with foreign exchange
* Economy on verge of bankruptcy (Recasts with central bank reversing trading ban)
By Natalia Zinets and Peter Graff
KIEV, Feb 25 (Reuters) - Ukraine's central bank unexpectedly banned most currency trading on Wednesday, only to abruptly reverse the decision overnight, causing havoc in the market for the plunging hryvnia.
The ban had been imposed in the morning, drawing a rebuke from Prime Minister Arseny Yatseniuk, and had been due to stay in place until the end of the week. But hours later, without giving any explanation, the bank did a sudden U-turn.
The earlier move had halted all trading between banks on behalf of their clients, which accounts for the overwhelming majority of official transactions in a market with turnover of hundreds of millions of dollars a day.
It also put the currency's true value in limbo throughout the day, with little or no trading taking place to set a price, before the bank jumped in to buy dollars before markets closed.
A separatist war in the east of the country has made it difficult to stabilise an economy on the verge of bankruptcy, and the hryvnia currency has already lost more than half its value so far this year after halving during all of 2014.
Clearly concerned about the situation, the International Monetary Fund on Wednesday said it was ready to help Ukraine with its foreign currency issues.
"IMF staff are in close contact with the National Bank of Ukraine and stand ready to assist in designing measures that will address excessive and temporary imbalances in the supply and demand for foreign exchange," an IMF spokeswoman said in a statement released in Washington.
With only the bank buying dollars on Wednesday, the official exchange rate rose. But traders warned that demand for dollars had simply been pushed back, warning that this could drive the currency even lower once restrictions were removed.
At the market close, the central bank announced it had bought $80 million at an official rate of 28.046 to the dollar, close to the rate at the start of the week and 12.8 percent higher than the close after a plunge on Tuesday.
Earlier in the day it had offered to buy dollars at a rate that would have implied a hike of nearly a third in the hryvnia's value. It gave no explanation for the discrepancy.
Prime Minister Yatseniuk told a televised cabinet meeting that the ban was bad for the economy and criticised the bank for imposing it without consulting his government. He had found out about it in the morning from the Internet, he said.
After an emergency meeting convened by President Petro Poroshenko, the government then signalled support of a kind for the bank, with Finance Minister Natalia Yaresko joining bank chief Valeria Gontareva at a hastily-arranged news conference.
They said little about the ban, but both said the recent plunge in the currency was unfounded, predicting that Kiev's finances would stabilise within weeks when they expected to start receiving funds from an IMF bailout.
"There are no fundamental reasons for such a severe fall in the hryvnia rate. The central bank sees none, the government sees none, and the IMF sees none," Gontareva said. "As soon as we start getting real help from our international sponsors ... we are looking into the future with perfect calm."
Exporters in Ukraine are required to sell 75 percent of their hard currency income, helping to ensure there would be some supply when the central bank offered to buy dollars on Wednesday.
But traders said the restrictions would store up demand that would overwhelm the hryvnia once it was unleashed.
"So, they have halted trade until the end of the week. What happens then? Will the situation really improve? Where is the demand for currency going to go?" said a currency trader at one bank, speaking on condition of anonymity required by the employer and before the ban was unexpectedly lifted.
"On the contrary, it will just build up and will speed up the fall of the hryvnia next week."
There were hopeful signs from the eastern front on Wednesday, however, with the army reporting its first day without combat fatalities since long before a ceasefire deal was due to take effect on Feb 15. Pro-Russian separatists who initially ignored the ceasefire to advance last week were now pulling heavy guns from the front, as required under the truce.
Exchange kiosks in Kiev, permitted to buy up to 3,000 hryvnias from members of the public, were offering dollars for 39 hryvnias, around 20 percent worse than rates advertised in the windows of commercial banks where dollars were simply unavailable.
A construction worker exchanging dollars at a kiosk in a grocery shop in return for a bag filled with thousands of hryvnia, laughed and told shoppers: "Soon we will have to walk around with suitcases for cash, like in the 1990s."
There were no queues. A cashier at one central Kiev exchange booth said people were buying and selling only small amounts "when they really need to" because of the very high rates. (Additional reporting by Pavel Polityuk in Kiev and by Anna Yukhananov in Washington; Writing by Peter Graff; Editing by Crispian Balmer)