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US likely to lift interest rates

Fresh signs of growth in America's manufacturing industry cemented expectations that the Federal Reserve will raise US interest rates later this month.

Yesterday's figures gave financial markets, already nervous about military action in Iraq, an attack of the collywobbles. The Dow Jones index fell more than 50 points during the morning, triggering the New York Stock Exchange's curbs on automatic trades, although it recovered to just 13 points down at 5,603.63 by late morning. In London, the FT-SE 100 index ended nearly 29 points lower at 3,855.9. Shares also fell elsewhere in Europe.

Oil prices rose to their highest since April as a result of America's intervention in the Middle East, with the benchmark Brent crude future price up 79 cents to $22.78 a barrel.

The National Association of Purchasing Managers reported an increase in US manufacturing activity in August. Its index climbed from just above the 50 "boom-bust" threshold in July to 52.6 last month, a little higher than expected. Output, orders, employment and price components of the index all rose.

Separate figures showed a further increase, of 0.2 per cent, in the index of leading indicators for the economy.

Many Wall Street analysts now expect a big increase in employment last month to be reported in Friday's jobs report, the most influential of the monthly economic statistics.

Federal Reserve officials recommended an increase of a quarter to a half point in interest rates last month in reaction to signs that the economy was gathering pace rather than slowing down as expected. Their advice was ignored by the Fed governors on its policy-making Open Markets Committee but analysts do not think this will happen again at the 24 September meeting.

The Fed meeting at the end of the month will take place a day after Kenneth Clarke, Chancellor of the Exchequer, and Eddie George, Governor of the Bank of England, are due to hold their next meeting. City experts think there is a chance Mr Clarke could decide on a base rate cut at today's meeting, before the window of opportunity closes.