In a move to jumpstart the nation's faltering economy, Federal Reserve policy-makers slashed a key interest rate yesterday by half a percentage point - double what most financial experts were expecting - sending it to a 41-year low.

The 12-member Federal Open Market Committee voted unanimously to lower the federal funds rate - the rate banks charge each other on overnight borrowings - to 1.25 percent. The committee also reduced the more symbolic discount rate to 0.75 percent.

"I think simply [the Fed] ran out of patience with the economic recovery," said Steven H. East, chief economist at Friedman, Billings, Ramsey Group, Inc. in Arlington, Va.

The Fed said in a statement that lower interest rates, coupled with productivity gains, are "providing important ongoing support to economic activity. However, incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment.

"In these circumstances, the committee believes that today's additional monetary easing should prove helpful as the economy works its way through this current soft spot," it said.

Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis, said the Fed's move was "pre-emptive, making sure that the economy does not slip into a double-dip recession and, God forbid, deflation.

"The Fed decided to catch us with our pants down in view of their concerns not only about the weak economy, but also the growing possibility of a war with Iraq, which could have major implications for the economy," he said.

Buffalo-based M&T; Bank Corp., which is buying Baltimore-based Allfirst Financial Inc., quickly said it would lower its prime lending rate today to 4.25 percent from 4.75 percent. Other banks are expected to follow.

The reduction should affect everything from car loans to business loans to mortgages and some credit cards, experts said.

Despite the size of the cut, it will take six months to a year before the reduction is felt in the economy. Economists agreed that yesterday's action was designed to boost the confidence of consumers and businesses owners.

"You get a bigger psychological boost from a bigger rate cut," East said.

A Fed reduction was widely anticipated, but few economists predicted a cut of a half a percentage point.

"I thought it would be a quarter, and that is what everybody else thought," said Donald R. Hays, president and investment strategist at Hays Advisory Group in Nashville, Tenn. "You had some of these guys way out in left field that were saying a half."

Some experts said the Fed cut rates because investors had already factored such an action into their decision-making, driving stock prices higher in recent weeks.

"They [the central bank policy-makers] want the stock market to move," Hays said. If it falls, the market "is a dampening force on consumer sentiment and on corporate sentiment. That had something to do with it, although [the Fed policy-makers] wouldn't admit it in 100 years."

East, however, said, "I don't think this is a panic move, I don't think they are scared."

The markets reacted favorably to the news, with major indexes finishing higher across the board. The Dow Jones industrial average, which is made up of 30 large companies, rose 92.74 points, or 1.09 percent, to 8,771.01.

The easing was the Fed's first since Dec. 11, the last of 11 cuts it made last year. Eight of those cuts were of half a percentage point.

The Fed moved aggressively last year after the country slid into recession, and some economists are worried that it could fall back, or double-dip. But most experts see the economy staggering ahead until next year, when it should start to grow at a steady clip.

This year, growth has been in fits and starts. In the first quarter, the gross domestic product - the total value of goods and services produced in the United States - barreled forward at a 5 percent annual rate. It crawled at a 1.3 percent annual rate in the second quarter and sped up to a 3.1 percent annual rate in the third quarter.

"I think we are in a very choppy recovery," East said. "We are having a muted recovery after a muted recession. I think this is typical after what you see in a recession that isn't that bad."

Not everyone thinks the Fed should have cut interest rates.

"I am not at all convinced that monetary policy is the most effective weapon right now," Sohn said. "My view is that monetary policy is being a bit impotent. It is probably time to move on to fiscal policy, like tax cuts."

Kenneth Mayland, economist at ClearView Economics in Pepper Pike, Ohio, agrees that tax cuts might be the best weapon to stimulate the economy.

"It is time for Congress and fiscal policy actions to chime in here," Mayland said.

"Tax cuts are immediately felt by the economy, as opposed to a one-year lag. I'd like to see the Fed put the ball in Congress' court."

Not everyone will benefit from lower interest rates, Sohn said. Companies with lower credit ratings might still find it difficult to get financing.

In addition, anyone living on a fixed income will be hurt by lower interest rates on savings accounts.

"They are going to be worse off, not better off," Sohn said. "I think there are some pros and cons" to the cut.