UPDATE 1-Fed's George says pace, endpoint of rate hikes still matter of debate

(Adds quotes on inflation)

Aug 18 (Reuters) - The recent easing of U.S. financial conditions, including a surge in stock prices, may have been based on an overly optimistic sense that inflation was peaking and the pace of interest rate increases was likely to slow, Kansas City Federal Reserve President Esther George said on Thursday.

In comments to a Kansas City economic group, George said the pace and ultimate level of future rate hikes remained a matter of debate. "To know where that stopping point is ... we are going to have to be completely convinced that (inflation) number is coming down," she said.

George did not state a preference for whether the Fed should approve a third straight 75 basis point rate increase when policymakers meet next month, or a smaller half point increase - the two core options under consideration.

But she made clear that the drop in inflation registered in July, while good news, was not evidence the underlying problem was fixed. Much of the decline was related to energy costs, she noted, while prices for a broad set of other services and goods continued to increase.

"That is hardly comforting," she said. And recent "abysmal" productivity numbers, which imply that workers are producing less for each dollar they are paid, could make controlling inflation that much harder, she added.

(Reporting by Howard Schneider; Editing by Paul Simao and Leslie Adler)