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

Spending had weakened not only among consumers but in businesses and industrial production, while a sharply slowing global economy was "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, were expected in the near future.

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

Most US stocks fell Wednesday despite the announcement, after Wall Street rallied by more than 10 per cent on Tuesday partly in anticipation of the Fed's easing of monetary policy. The blue-chip DowJ ones Industrial Average had fallen 0.8 per cent at the close of Wednesday's trading session.

The government's initial estimate of US third-quarter growth is due Thursday. Economists expect an annualized 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 annual rate, largely due to strong exports and 150 billion dollars in tax rebates, paid out during the spring as an economic stimulus.

Credit availability has curbed sharply and stock market values plummeted since the collapse last month of investment bank Lehman Brothers Holdings Inc, which along with the troubles of other financial industry giants sent the credit sector reeling to 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 eased the 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 in the process of implementing massive rescue packages that generally include taking equity stakes in troubled banks in exchange for much-needed cash.

Aside from a one-year period from June 2003-June 2004, interest rates in the United States have not been at 1 per cent or below since1958. 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.