The euro has gained considerable ground against the US dollar after NATO's decision to suspend air strikes against Yugoslavia as part of the Kosovo peace plan.

The euro jumped to $1.0503 from $1.0464 late yesterday, after NATO Secretary-General Mr Javier Solana said the alliance had suspended its 79-day air campaign against Yugoslavia amid signs that Serb troops had begun to withdraw from Kosovo. However, the euro closed at 65.47p against sterling from 65.23p. As a result, the pound closed at 83.12p from 82.84p.

According to Mr Jim Power, chief economist at Bank of Ireland, the euro was supported on two sides by continuing positive data showing signs of recovery in Germany, as well as a sell-off in US asset markets which undermined the dollar. The markets are now expecting an interest rate rise in the US by the end of the year.

Sterling did not suffer despite an unexpected interest rate cut from the Bank of England, with British interest rates at their lowest since November 1977 at 5 per cent.

"Rates are now too low," said Mr Richard Jeffrey, group economist at Charterhouse in London. "That is likely to lead to increased strength in the economy which raises the risk sterling could actually go higher."

The Bank of England said it cut rates because underlying inflation was now more likely to undershoot its 2.5 per cent target.

According to Mr Michael Crowley, economist at Davy Stockbrokers, the euro gained slightly from German unemployment data. Pan-German unemployment for May fell to 3.998 million on an unadjusted basis from 4.145 million in April.

The figures helped only slightly as the currency had already gained on Wednesday after a leading labour union official said the number would go below four million.

It was also announced that panGerman industrial output for April rose a seasonally adjusted 1 per cent from March.

Mr Crowley said the figures suggested the worst may be over for the German economy but nevertheless any recovery was likely to be pretty gradual.