ECB boss Jean-Claude Trichet's move had been predicted

With inflation in the eurozone at 2.5% over the past three months, well above the bank's 2% target, most analysts predicted the rise.

The ECB decided it had room to raise rates, as recent surveys had shown rising optimism among European firms.

The decision came after the Bank of England raised UK rates to 4.75%.

Analysts pointed to a recent European Commission report which said business confidence in the eurozone in June was at its highest level since the beginning of 2001.

They said this gave the ECB the space to raise rates by one quarter of a percentage point to tackle inflation without having to worry unduly about the knock on effect on business.

Worldwide hikes

The rise is the fourth such increase in eight months as the ECB tries to curb inflation.

It is also the latest in a series of worldwide rate rises. Earlier in the week, Australia increased its rates to 6%.

In the United States, the Federal Reserve has raised rates on 17 consecutive occasions to 5.25%, and it may do so again next week.

Even Japan, which has had near-zero interest rates, saw its central bank make its first increase in rates in six years last month.

At his press conference following the decision to increase rates, ECB President Jean-Claude Trichet seemed to suggest that more rises might be necessary.

With eurozone inflation likely to remain above 2% into 2007 he said the ECB will "continue to monitor very closely all developments to ensure price stability over the medium to longer term".

HSBC economist Patrik Schowitz said "people are taking that as a sign that he [Mr Trichet] doesn't think rates are too high yet".

Eurozone interest rates are expected to hit 3.25% or even 3.5% by the end of this year.