The Federal Reserve's top policy makers meet today amid intensified expectations in international financial markets that the US central bank will cut interest rates for the first time in nearly three years.

US equity markets moved higher yesterday morning as expectations of a rate cut hardened. But by mid afternoon New York time, the Dow Jones Industrial Average was little changed. It later closed up 80.07 at 8108.84. US bond prices were slightly lower as investors have largely discounted an interest rate move in the last week. In Dublin the ISEQ index of Irish shares gained almost 2.4 per cent, as the financial stocks rose sharply, reversing sharp falls suffered towards the end of last week.

A decision today by the Fed's open market committee to respond to the deepening global economic crisis with an easing of policy would mark a dramatic reversal of the central bank's stance in just a few months.

In July, Alan Greenspan, the Fed chairman, warned that inflation still posed a more serious risk to the US economy than did a slump. But since then, officials believe, the rapid deterioration in the international environment has hit US prospects hard, and last week Mr Greenspan signalled that a rate cut was imminent.

Policy-makers seem mainly concerned about the threats to the US financial system from the global economic turmoil. While overall US growth prospects have deteriorated recently, the risk of a recession remains slight, with strong consumer spending underpinning robust demand. But the financial effects of the international crisis seem more of an immediate threat.

Last week's rescue of LongTerm Capital Management, the hedge fund facing large losses after adverse movements in international markets, is an example of the risks confronting the US, say some economists.

"The LTCM problem could be just the tip of the iceberg and may turn out to be the primary reason why the Fed will feel compelled to lower rates," said Cary Leahey, of High Frequency Economics, a research group in New York.

Market expectations about the scale of any cut in borrowing costs today are mixed. For the past few years, the Fed has adopted a cautious approach to interest rate changes, moving its main lending rate - the Fed funds target - in 0.25 percentage-point steps.

But many economists say the severity of international economic conditions may force the Fed to cut the rate by as much as 0.5 percentage points. That would be the first half-point cut since 1992.

"The Fed will most likely cut the Fed funds rate by 50 basis points (0.5 percentage points)," said Ed Yardeni, an economist with Deutsche Bank Securities in New York. "They need to cut it by 100 basis points immediately to offset the forces of deflation." The Fed funds target rate at the moment is 5.5 per cent. But an unusually large cut could alarm international markets. It might suggest the Fed is much more concerned about immediate prospects than investors. "It's like a poker game; we can't see what's in their hand. A big, sudden move could indicate they really know there's something to worry about," said Robert Brusca, of Nikko Securities.

Meanwhile Asahi Bank and Tokai Bank, two of Japan's largest commercial banks, are forging an alliance that could be the first step towards creating the country's second-largest bank with combined assets of Yen61, 200 billion ($450 billion). The tie-up is the latest in a consolidation trend provoked by the banks' stretched balance sheets and the country's financial "Big Bang". It came as a number of Japanese financial institutions revealed the scale of their exposure to Japan Leasing, the affiliate of Long-Term Credit Bank (LTCB) of Japan that went into bankruptcy on Sunday with outstanding liabilities of Y2,180 billion .

LTCB itself, which under the latest agreement between the opposition and ruling Liberal Democratic Party will be nationalised, is owed Y255.6 billion. Its shares fell 41 per cent to just Y14. Mitsubishi Trust is owed about Y145 billion, while Sumitomo Trust's exposure is Y135 billion, and that of Norinchukin, the central office of the agricultural credit unions, about Y120bn.

The Asahi-Tokai alliance appears to have been put together hastily. Hideo Ogasawara, president of Tokai Bank, said there was not sufficient time or funding to arrange a merger.