US interest rates slashed to 2.25%

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The decision to cut the main US rate to 2.25% comes as fears grow over America's economy amid a deepening in the credit crisis gripping global money markets.

But the cut was not as much as markets had been hoping for, with speculation mounting that the Fed was poised to trim 1% off rates.

The FTSE 100 Index in London - which closed before the rates decision - soared by 3.5% on expectations that the US might deliver a 1% cut.

On Wall Street, the Dow Jones Industrial Average closed up 420.41, or 3.51%, at 12,392.66, the largest one-day rise since 2002.

The Fed said in a statement accompanying its decision that "the outlook for economic activity has weakened further".

It said: "Financial markets remain under considerable stress and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

The US cut follows a series of spectacular decreases since mid-September as the world's biggest economy struggles against a sharp downturn.

Earlier this year, the Fed cut rates by 1.25% in less than two weeks, bringing the cost of borrowing down to its lowest level since June 2005.

And in a rare Sunday intervention, last week the Fed lowered the rate at which it lends to banks by 0.25% to 3.25% to ease financial and economic turmoil. The weekend measure was not enough to stop stock markets globally tumbling on Monday on news of the rescue and cut-price sale of US investment bank Bear Stearns.