ISLAMABAD - Pakistan's central bank said on Monday it was watching foreign exchange markets closely and was prepared to take action to curb excessive volatility, after the sharp fall in the rupee over recent days.

In a statement following its decision to increase its key policy rate to 12.25%, the State Bank of Pakistan (SBP) said the recent movement in the rupee "reflects the continuing resolution of accumulated imbalances of the past and some role of supply and demand factors".

"SBP will continue to closely monitor the situation and stands ready to take measures, as needed, to address any unwarranted volatility in the foreign exchange market," it said.

(Reporting by James Mackenzie Editing by Robert Birsel) ((; +92 300 8566 702 ; Reuters Messaging: Reuters Messaging