European Central Bank president Jean-Claude Trichet said the ECB had considered cutting interest rates on Thursday, signalling a sharp change of course amid unprecedented turmoil on global markets.

"We have examined two options," Trichet told a press conference in Frankfurt after the bank left its main lending rate unchanged at 4.25 percent.

"One, letting interest rates (be) unchanged, another one decreasing interest rates," Trichet said.

"Our unanimous conclusion was that we were right in maintaining interest rates as they are but we examined the two options," Trichet said, stressing repeatedly "the extraordinarily high level of uncertainty" on financial markets.

Abrupt change

Analysts highlighted the abrupt change from previous meetings when the ECB chief had emphasized risks that inflation could spiral out of control and that the ECB's first duty was to control rising prices rather than bolster a slowing economy.

On Thursday, an ECB statement read by Trichet said, "The most recent data clearly confirm that economic activity in the euro area is weakening, with contracting domestic demand and tighter financing conditions."

"The economic outlook is subject to increased downside risks, mainly stemming from a scenario of ongoing financial market tensions affecting the real economy more adversely than currently foreseen," he said.

In light of weaker demand, inflationary pressures "have diminished somewhat but they have not disappeared," Trichet said.

"Trichet took a giant step towards a rate cut," Commerzbank chief economist Joerg Kraemer commented.

UniCredit Markets chief economist Aurelio Maccario said the "ECB meeting brought about a significant change in the central bank's stance."

"Certainly the time of the first rate cut is now very close," he added, setting a timeframe of "anytime from November onwards."

Interest rates to fall

The economist felt Trichet would have made it clear if lower interest rates were likely in November but concluded, "We are left with the belief that a rate cut by the end of the year is a virtual certainty."

At the Natixis brokerage, economist Sylvain Broyer said, "We expect the easing cycle to be of greater scope and to materialize sooner" than most had previously expected.

Analysts generally tipped December for the cut but Clemente De Lucia of BNPParibas summed up the mood, saying, "Should economic conditions deteriorate further in the coming weeks, an early move by the bank might not be excluded."

With Germany's IG Metall union seeking its biggest pay raise in 16 years for 3.6 million workers, Trichet warned again that excessive wage agreements could keep inflation higher than the bank's target of just below 2.0 percent.

But even at the current level of 3.6 percent, down from a record 4.0 percent in July, inflation was not the bank's primary concern.

Bank failures, rescues

 series of massive bank failures and rescues in the United States and Europe have left markets in a state of near panic, with governments rushing to put in place costly safety nets to protect their economies from serious damage.

"No less than four European financial institutions (have) had to be rescued with government funds," noted Nikolaus Keis at UniCredit Markets.

The US Senate has passed a $700 billion (500-billion-euro) plan to rescue the country's entire banking sector from problems that emerged more than a year ago when the market for high-risk, or subprime, mortgages melted down.

The plan is disputed however, with many arguing it is a bailout of the banks that caused the problem in the first place while supporters say that not to pass it would spark a global recession or worse as the banking system collapses.

Trichet spoke of "a situation that we have never encountered before," and underscored repeatedly the exceptional level of uncertainty.

Those problems have spread to the "real economy," with eurozone manufacturing activity falling in September for the fourth month running and unemployment starting to creep back up in several countries.

Trichet vowed to keep inflation in check to underpin economic recovery and called on governments to shoulder their responsibilities as well.

Asked if he backed a mooted European Union fund similar to the one being debated in the United States, the ECB chief did not answer directly but said, "In exceptional cases when financial stability is at stake...there are cases where we need decisions by governments, that's clear."