Federal Reserve officials are considering a cut in US interest rates, possibly at the central bank's next meeting at the end of the month, in the face of a deteriorating economic outlook and severely strained conditions in financial markets.

The Fed's willingness to consider a reduction in the cost of credit marks a turnaround from the past few months, when soaring food and energy prices turned its attention to the risk of surging inflation.

At the regular September meeting, after oil prices had receded, chairman Ben Bernanke and his colleagues on the Federal Open Market Committee decided it was still too early to shift the federal funds target rate down from 2%.

A reduction in the fed funds is still far from certain, in part because inflation is still a problem. But in just the past few weeks, as the credit crisis pounded the financial system, economic data have become steadily worse, raising fears of a recession.

Last week, motor vehicle manufacturers said they were hammered in September by tight credit conditions and lower consumer demand. Monthly car and light-truck sales were the worst since April 1992, with Toyota and Ford posting a drop in sales of more than 30% from a year ago.

Manufacturing also dived in September. The Institute for Supply Management's (ISM) monthly gauge of the sector dropped to its lowest since October 2001. The index fell to 43.5 in September from 49.9 in August. Figures below 50 indicate a contraction for the sector, and the latest level generally corresponds to overall economic growth of about 0.8% a year, the ISM said.

Meanwhile, a report on con-struction spending showed that commercial building activity slowed in August, adding to weakness in the residential sector. Global indicators of growth have also softened noticeably.

The weak economy has also pushed jobless claims to a seven-year high. Taken together, the risk of a severe recession has re-emerged in recent weeks. Earlier this year, Fed officials had believed such a threat had dissipated.

Bernanke last week warned US congressional leaders of "grave threats to financial stability", and suggested the financial damage so far - even with the government's $700bn rescue bill for distressed banking institutions - would pummel the overall economy. "There have been very few cases where you've had this kind of financial disruption without a significant effect on the economy," he said.

Futures markets have priced for a high probability of a quarter or half-percentage point cut in the federal funds rate, at which banks lend to each other overnight, by the end of the month.

Other central banks could end up moving in the same direction, though it still looks unlikely that they would do it in a co-ordinated manner. The UK futures market has priced in a cut in British base rates this week.