Australia's ailing economy got a double dose of desperately needed stimulus yesterday as the government pledged billions in new spending to avoid recession and the central bank cut interest rates to record lows.

The news lifted the Australian dollar off 10-week lows against the dollar and bill futures, which had factored in the possibility of a bigger rate cut, fell.

"Australia is facing an unfolding national and international economic emergency," Prime Minister Kevin Rudd said in announcing €20.2 in stimulus spending to protect the Australian economy from the global financial crisis.

The plan includes €14.2 billion for infrastructure, schools and housing, as well as €6.3 billion cash payments for low and mid-income earners to be paid in March.

"It is a strategy to which we will add in the future as is necessary," Mr Rudd told reporters.

Hours after the government announced its spending plan, the Reserve Bank of Australia (RBA) cut its key cash rate by a bold one percentage point to a record low 3.25 per cent, citing the grimmest global outlook in many years. The cut was in line with market expectations and brought the easing since September to a massive four percentage points. Investors are counting on further cuts to take the cash rate to two per cent or less by May.

"Policy settings in Australia are now very stimulative," said Michael Blythe, chief economist at Commonwealth Bank. "The RBA may want to judge what impact these cuts and the stimulus package has on the economy before moving further, but still, it would rather cut too much than not cut enough," he said.