Proclaiming that the outlook for recovery in the US economy was "more promising" than before, the US Federal Reserve yesterday announced it would leave interest rates unchanged, ending a run of 11 straight rate cuts which began last January as the economy headed towards recession.

The Fed's upbeat assessment was underlined by totally unexpected data from the Commerce Department showing that US gross domestic product had grown in the final three months of last year, defying analysts' predictions that it would contract by around 1.0 per cent.

Real GDP, the broadest measure of the economy's health, rose at an inflation-adjusted annual rate of 0.2 per cent in the fourth quarter, helped by increased defence spending.

Nominal GDP, before adjustment for inflation, fell by 0.1 per cent, the first decline since 1982.

Coming after a string of positive data in recent weeks, the real GDP growth strengthens the prospect of an early end to the recession in the US, which officially began in May last year.

The Fed open market committee, concluding a two-day meeting in Washington under chairman Mr Alan Greenspan, announced its expected decision yesterday afternoon to leave its target for federal funds rates unchanged at a 40-year low of 1.75 per cent.

Wall Street reacted positively, with the Dow shooting up by 200 points from morning lows when the markets were battered by doubts about accounting, centred on Tyco International and Elan - whose shares fell more than 30 per cent before making a partial recovery.

"Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent," the Federal Reserve said, while cautioning that "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future".

"We believe the Fed has eased enough to end the recession," said Mr Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago, but "signs of excessively tight money supply throughout 2001 are clearly visible".

President George W Bush welcomed the GDP figure, but played down the prospect of an early rebound - something which would undermine his proposals for an economic stimulus package including tax breaks for corporate America.

"Today's report is positive, but we cannot take growth and job creation for granted," he said.

His remarks were echoed by US Treasury Secretary Paul O'Neill, who said a fiscal stimulus package would further help the recovery and provide jobs.