The move was widely expected and supported by most economists, who said there was little threat from inflation in the UK.

The lower interest rates are intended to stimulate economic growth, amid worries that economic weakness in the United States could turn into a global downturn and hit the UK as well.

So far, most economic indicators suggest that much of the domestic economy is thriving, although there is a slowdown in the UK's manufacturing sector.

A bigger surprise, though, came less than one hour later, when the European Central Bank announced it would cut rates by a quarter point as well - to 4.5%.

Business, unions welcome rate cut

The rate cut was welcomed by UK industry. David Sears, the deputy director of the British Chambers of Commerce, said the rate cut would "boost... confidence, and add further insulation against the US slowdown and the wider impact of foot and mouth."

John Monks, the general secretary of the Trades Union Congress, John Monks, described the cut as "a sensible insurance policy which will help protect the UK from any economic fallout from across the Atlantic".

Seconds after the Bank announced its decision, some of the UK's leading mortgage lenders, including Halifax and HSBC, announced they would cut their interest rates on mortgages.

In a statement, the Bank's rate setting body - the Monetary Policy Committee (MPC) - said it remained concerned about global economic slowdown.

"The world economic prospect has on balance continued to weaken," it said.

"The extent and duration of the slowdown remain uncertain."

Confidence falls

A surprise US rate cut last month - the fourth this year - had increased pressure on the MPC to follow suit, in an effort to keep the economy out of recession.

Figures released on Tuesday by the Confederation of British Industry (CBI) had shown UK business confidence continuing to fall sharply, adding to pressure for a cut.

The Bank of England had already cut interest rates twice in 2001, bringing the cost of borrowing down for homeowners and businesses from 6% at the start of the year to 5.5% in April.

The bank had earlier reduced rates, in reaction to a slowdown in the economy and the impact of the foot-and-mouth crisis.

'Not as weak'

Bank of England Governor Sir Edward George had said he would be willing to cut rates further if there was evidence of a continuing slowdown.

Inflation remains well below the government's 2.5% target, leaving room for further cuts.