The European Central Bank left its benchmark interest rate at 4.25 percent today, and markets are now awaiting President Jean-Claude Trichet's take on whether global financial havoc has affected the rate outlook.

All 81 analysts polled by Reuters last week had expected the ECB to keep rates at a 7-year high for the third month in a row on Thursday, due to its concerns about above target inflation.

But there is growing evidence that the region's economy is suffering after more than a year of financial market turmoil, which has deepened dramatically in recent weeks.

"Leaving rates on hold is no surprise but the economic landscape in favour of such a decision is changing quickly," said UniCredit analyst Aurelio Maccario.

The key is whether ECB policymakers believe the ructions of the last few weeks have inflicted enough economic damage to warrant possible interest rate cuts in the next few months, even though inflation looks set to remain far above target.

"We are fairly sure that Trichet will acknowledge that the last few weeks have increased the downside risks to the wider economy," said Royal Bank of Scotland economist Gareth Claase. "If he then also tones down his stance on inflation then, yes, it could pave the way for rate cuts."

"However, we think he may say that the appropriate response was injections of liquidity and capital, and that it is not necessary or helpful to adjust interest rates at the current juncture. That could surprise people on the hawkish side."

The euro was little changed against the dollar after the decision <EUR=> but European stocks pared gains.

Among economists there is a now a growing belief that rate cuts are inevitable, the only question is when.

The collapse of Lehman Brothers, an unprecedented series of bank rescue deals and evidence that Europe has been sucked into the credit crisis has fanned pessimism about the economy. Gloomy economic data and a rise in unemployment suggest a euro zone recession is now increasingly likely.

Interest rate futures imply rates will fall to 4.0 percent by the end of the year, dropping further to 3.75 percent by February. Most analysts polled by Reuters, on the other hand, see a move only in the first quarter of 2009.

News that the U.S. Senate endorsed a reworked $700 billion bailout of the financial industry on Wednesday is likely to be welcomed by the ECB. However it is not a done deal. The plan faces a final hurdle in the House of Representatives, which rocked markets this week by rejecting an earlier version.

French President Nicolas Sarkozy will host a meeting on Saturday with the leaders of Britain, Italy and Germany plus Trichet to discuss the financial crisis.

But prospects for a European equivalent to the U.S. bailout appear weak after Germany and France clashed over behind-the-scenes plans for a government-funded safety net.