Mr Alan Greenspan, chairman of the Federal Reserve, yesterday said the US economy had stabilised in recent weeks but had yet to show signs of acceleration.

His guarded assessment of the prospects for renewed strong growth in the US were underlined by a new welcome for the short-term boost from last month's $350 billion (€298 billion) tax-cut package, due to come into effect next month.

"I have to admit that, fortuitously, this particular cut in taxes is happening at the right time, although I doubt very much one could have planned that in advance," Mr Greenspan told a conference of central bankers in Berlin by satellite.

The statement contrasted with remarks Mr Greenspan made earlier in the year, when he said it was not clear that the US economy needed the stimulus from a tax cut. Yesterday's statement suggested that the risk of weaker domestic demand had increased since then.

Mr Greenspan also said the risks from deflation would be "on the agenda" at the Fed's meeting to set interest rates this month.

Most economists read yesterday's statements as a signal that Mr Greenspan was continuing to caution against over-optimism, and leaving the door open for more rate cuts if needed. Two-year US interest rates fell to record lows on his comments.

Mr Greenspan signalled his determination to head off sustained deflation, saying that interest rate cuts could be seen as "insurance" against such an outcome.

"He is still on the theme that things are getting better but they will have to get better quickly to validate some of the \ projections for the summer," said Mr Robert DiClemente at Citigroup. Several of the large investment banks have made optimistic forecasts that the US economy could reach 3-4 per cent growth in the third quarter of the year.

But while more confidence in financial markets suggested "a marked turnaround" in the real economy, Mr Greenspan said his best judgment was that such an acceleration had not yet begun.

He repeated his argument that the risk of sustained deflation in the US was low, but the uncertainties involved meant it was worth preparing for the eventuality. He drew a distinction between short-lived falls in prices and the "corrosive deflation" which created a deflationary psychology, driving down asset prices, growth and profits.

At the Berlin conference, Mr Ernst Welteke, the Bundesbank president, also admitted yesterday that Germany might suffer a period of falling prices, but not the "pernicious" deflation that had gripped Japan.