By David Mchugh
The Associated Press

FRANKFURT, Germany - The European Central Bank Thursday slashed interest rates in an attempt to get the continent's stagnant economy moving, and the bank's president said it had room to go lower.

ECB head Wim Duisenberg said Thursday's half-point reduction in a key refinancing rate to 2 percent left interest rates at a level no euro-zone country has seen since World War II.

"They are historically low," he said.

The rate had been 2.5 percent since a quarter-point cut March 6 that many decried as too timid.

With the bolder half-point cut, the ECB drew closer to the more aggressive U.S. Federal Reserve, which has brought its key rate down to a 41-year low of 1.25 percent. And if the Fed could contemplate further cuts, Duisenberg said, "then you can imagine we have not exhausted our room for maneuver."

The Fed's rate-policy-settijg committee next meets June 24-25.

Duisenberg added that narrowing the gap in interest rates between the U.S. and the 12-nation group that shares the euro currency could support the U.S. dollar. "That in itself takes away one impulse for the exchange rate movement as we have seen it over the past couple of months," he said.

Higher interest rates in Europe have attracted cash into euro-zone assets - helping drive up the euro to a record level of $1.1932 May 27.

Despite Thursday's decision, the euro rose for the day on negative news about the U.S. economy in the form of higher U.S. jobless claims. It was quoted around $1.1849 at the close of trading in Europe, up from around $1.1675 in the morning.

The main reason for the cut, Duisenberg said, was the bank's assessment that inflation is now under control - under the bank's 2 percent guideline and is expected to fall further in 2004. Year-on-year inflation in the euro zone was 1.9 percent in May.

While lower rates can boost growth, a mistimed cut can spur inflation later.

European politicians, who craved a big cut to help their lagging economies and growing budget deficits, praised the decision. Europe's economy showed no growth in the first quarter, and three countries - Germany, Italy and the Netherlands - slid to the verge of recession.

"The ECB's decision is truly welcome," French Prime Minister Jean-Pierre Raffarin said after a meeting in Paris with Italian Prime Minister Silvio Berlusconi.

"It's a good step," Berlusconi said. "We need to support the European economy."

Earlier Thursday, the central bank in Sweden, which faces a Sept. 14 referendum on whether to adopt the euro, cut its key rate by a half-percentage point to 3 percent. But the Bank of England left interest rates in Britain, another euro holdout, unchanged at 3.75 percent.