Washington - The US Federal Reserve cut interest rates Wednesday by 0.5 percentage points to 1 per cent, the lowest level since June 2004, in an effort to keep the US economy out of a prolonged recession.

The US central bank acknowledged that economic activity had "slowed markedly" but made no mention of a recession that many economists expect is inevitable.

Spending had weakened not only among consumers but in businesses and industrial production, while a fast-slowing global economy was also "damping the prospects of exports," according to a statement from the Fed's governing board.

The crisis of confidence in financial markets was expected to "exert additional restraint on spending" by restricting the availability of credit to both households and businesses, a possible signal that further reductions, or at least a prolonged 1-per-cent rate, was to be expected in the near future.

The unanimous decision to cut the benchmark federal funds rate was in part made possible by declines in energy and other commodity prices that have helped ease inflation fears. The Fed said it expected inflation to "moderate in coming quarters to levels consistent with price stability."

US stocks showed little movement on the announcement, but rallied by more than 10 per cent on Tuesday in part on anticipation of the Fed's decision.

The government's first estimate of US third-quarter growth is due out Thursday. Economists expect a 0.5-per-cent contraction of the world's largest economy, according to a survey by Bloomberg News.

Second-quarter growth stood at a surprising 2.8 per cent, largely due to strong exports and a 150-billion-dollar tax rebate approved in March by Congress.

Credit availability has curbed sharply and stock market values plummeted since the collapse of investment bank Lehman Brothers Holdings Inc in September, which along with the troubles of other industry giants has placed the financial sector on the brink of collapse.

The Fed expressed confidence that the rate cut, coupled with joint actions in the past with other central banks and efforts to stabilize the financial system "should help over time to improve credit conditions and promote a return to moderate economic growth."

The last time the Fed cut its federal funds rate was part of a coordinated cut on October 8 with the European Central Bank (ECB), the Bank of England and China's central bank among others. The ECB is expected to cut rates again at its next meeting on November 6.

Governments in advanced economies are also in the process of implementing massive rescue packages that involve taking equity stakes in troubled banks to give them much needed cash infusions.

Aside from a one-year period between June 2003 and June 2004, interest rates in the United States have not been at 1 per cent or below since 1958. The Fed has regularly slashed rates over the last 13 months from a high of 5.25 per cent.

The Fed also cut its discount lending rate to banks by 0.5 percentage points to 1.25 per cent.