The European Central Bank shocked financial markets today by cutting its main interest rate by a smaller-than-expected 25 basis points, taking it to a new low of 1.25 percent.

It also lowered its overnight deposit rate the rate currently setting the floor in money markets -- by 25 points, taking this down to just 0.25 percent.

The euro extended gains against the dollar on the decision and euro-zone government bonds and interest rate futures extended losses, with the yield on interest-rate sensitive two-year government bonds rising to its a near one-week high.

The ECB has now cut its benchmark rate six times from 4.25 percent since last October as the euro zone economy has gone from bad to worse.

The latest economic data have shown little sign of a let up in the recession, while annual inflation hit a record low of 0.6 percent in March and is expected to fall further.

Maltese banks last month opted not to follow the ECB lead to lower interest rates, saying they wanted to safeguard their deposit base.