The European Central Bank (ECB) has cut its key interest rate by a quarter of 1 per cent to 4.25 per cent.
Today’s cut is the third time the ECB has cut the minimum lending rate in its history.
The cut was widely expected by the money markets after recent evidence the slowing US economy was beginning to affect European businesses.
The euro shot up 0.20 cents against the dollar to day highs above $0.91 immediately after the cut which was seen as demonstrating that the ECB was finally responding to the euro zone's economic slowdown.
But the currency then quickly erased its gains to trade at $0.9071 by 2 p.m.
Economists turned their attention to the chances of another reduction in the near future and many were predicting that the ECB would cut its key rate again by the end of the year.
"From a economic point of view it's quite plausible. An interest rate cut was long overdue," said Michael Schubert, an economist at Commerzbank in Frankfurt.
Mr Schubert predicted that the ECB would cut rates again by a quarter point in the final quarter of 2001.
Market speculation of a cut had mounted after a series of data indicated a marked slowdown in euro zone economic growth, especially in Germany and Italy, whose economies, ceased to grow in the second quarter.
Inflation has also been declining steadily, to 2.8 per cent in July from 3 per cent in June and is seen edging down further, even though it still remains well above the ECB's two percent ceiling.
The ECB also said it lowered its marginal lending and deposit facility rates, which form the ceiling and floor for money market rates, to 5.25 per cent and 3.25 per cent respectively.