UPDATE 2-INTERVIEW-Bahrain saw no major capital flight-c.banker

* Government to issue $1 billion bond when costs reasonable

* Central bank to keep rates steady for now

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By Frederik Richter

MANAMA, Feb 24 (Reuters) - Bahrain is facing its worst unrest since the 1990s and downgrades by rating agencies, but the Gulf Arab kingdom's central bank governor said on Thursday he hopes to go forward with a planned $1 billion bond issue.

Rasheed al-Maraj also said he had not seen major capital flight after protesters emboldened by popular uprisings in Tunisia and Egypt took to the streets last week. Seven people were killed as security forces clamped down.

"So far there is no indication of a major capital flight from the island," Maraj told Reuters.

Major capital outflows could put the country's currency peg to the U.S. dollar under pressure and become a challenge for the central bank, whose net foreign assets are at nearly $5 billion. The small non-OPEC crude producer's central bank said on Sunday the banking system was working normally and promised all support to facilitate bank operations in the country, where nearly $10 billion in mutual funds is parked.