The Federal Reserve has kept US interest rates on hold, warning of the risk of "heightened geopolitical risks" on economic recovery.

The Fed, the US central bank, left interest rates at a 40-year low of 1.75%, despite an attempt by two of its chiefs to win a cut.

While saying it was confident that current economic policies would foster recovery, the Fed's open market committee (FOMC) warned that amid a period of growing tensions, the timing of the recovery was uncertain.

"Considerable uncertainty persists about the extent and timing of the expected pickup in production and employment owing in part to the emergence of heightened geopolitical risks," a committee statement said.

The decision comes amid repeated threats by President George W Bush to attack Iraq over arms fears, comments which have sent the price of oil soaring, raising company and household energy bills.

The committee also restated that greatest risk to the economy lay in sluggish growth rather than rising inflation.

Dissent noted

The Fed's decision had been widely expected as the US economy has struggled to achieve the recovery it had promised earlier in the year.

But Wall Street analysts seized on a vote by two FOMC members in favour of a rate cut as an indication that the outlook was more perilous than had been thought.

"What's interesting is the two dissenters," said Bill Quan, chief economist at Mizuho Securities in New Jersey.

"The votes are usually unanimous.

"It shows there is some prolonged debate about moving rates down another notch."

Christopher Low, chief economist at FTN Financial in New York, said: "This is the first time that there's dissent since the voting has been made publicly."

The Fed's chairman, Alan Greenspan, "tends to lean hard on FOMC members for unanimity", Mr Low added.

Market reaction

The Fed's assessment failed to reassure investors who have sent shares steeply lower in recent days, with the tech-heavy Nasdaq closing at a six-year low on Monday.

The Dow Jones industrial average share index closed down 189 points at 7,683.

"From an economic standpoint [the Fed] made the right decision," said Michael Kastner, at Deutsche Bank Private Banking in New York.

"The stock market would have been very happy with a rate cut."