Henry Paulson, the US Treasury Secretary, today admitted the American economy was in a sharp decline but refused to label the situation a "recession". His remarks came as Goldman Sachs and Lehman Brothers, two of Wall Street's biggest investment banks, reported falling profits.

Mr Paulson said: "We know we are in a sharp downclimb and there is no doubt that the American people know that the economy has turned down sharply. So to me, much less important is the label that is placed on it today. Much more important is what we do about it."

Action is expected to come from the US Federal Reserve later today, at 6.15pm GMT, which is forecast to cut interest rates by either 0.50 or 0.75 per cent to ease the credit crunch and head off recession.

In London, the FTSE 100 of leading companies closed 191.4 points up at 5,605, fuelled by US rate cut expectations. America's Dow Jones Industrial average rallied 306.80 to 12,273.10 ahead the of the Fed's decision.

The crisis across America's financial markets was laid bare today after Goldman Sachs - by far, the most successful of Wall Street banks - revealed sharp declines in revenues across some of its key divisions.

Goldman Sachs revealed that while its performance was better than Wall Street had expected, overall revenues across the business during the first quarter of the year, fell to $8.3 billion compared with $12.7 billion for the same period the year before.

The bank produced net earnings of $1.51 billion for the three months to the end of February, half of the sum it made for the comparative period in 2007.

The Wall Street bank, which had been seen as the least damaged by the credit crunch, recorded a $2.5 billion net loss for the three months to February 29 after losing $1 billion on residential mortgages, $1 billion on high yield debt, and a $532 million on principal investment operations which trade with the bank's own money.

But the sharp declines were less than analysts had feared and the numbers helped to briefly lift the dollar against the yen.

The bank's investment banking net revenues were down 32 per cent compared with the same three months the year before, and 41 per cent lower than for the fourth quarter of 2007.

Of that, net revenues produced by its financial advisory division tumbled 23 per cent compared with the first quarter of 2007, as the number of completed mergers and acquisitions slumped across the industry.

As banks and American corporates shied away from testing the deteriorating market conditions this year, new equity and bond issuance dried up across Wall Street.

Goldmans said that net revenues in the company's underwriting business were $509 million, 40 per cent lower than the first quarter of 2007.

Lloyd Blankfein, chairman and chief executive at Goldman Sachs, said: “Market conditions are clearly very difficult. But we saw strong customer activity across many of our franchise businesses in the first quarter. Although market conditions present many challenges at the moment, they also offer considerable opportunities.”

Across the bank's trading and principal investments division, Goldman suffered a 46 per cent decline in net revenues to $5.12 billion, as nervous investors waited for market conditions to improve.

However, higher management fees helped lift net revenues within the firm's Asset Management and Securities division, up 28 per cent to $2.04 billion.

Lehman Brothers confounded rumours that it may need to follow Bear Stearns and be rescued by a stronger bank.

Lehman Brothers reported a 57 per cent decline in its first quarter profit today after taking a $1.8 billion writedown relating to mortgage investments.

The bank announced a $489 million net income for the period, down from $1.15 billion the year before, but above analysts' expectations which sent the group’s shares up by more than 10 per cent in early trading.

However, the early jump in the share price followed a 19 per cent decline yesterday in the wake of Bear Stearns’ fire sale to JP Morgan.

Bear Stearns had been unable to meet a surge in margin calls by its creditors late last week as the credit crunch continued to escalate.

Lehman is thought to be among the most likely banks to follow Bear Stearns into a forced sale, prompting Richard Fulds, its chairman and chief executive, yesterday to say that a new facility set up by the Federal Reserve to lend money to struggling securities firms eliminated the danger of a liquidity crisis.

Lehman reported an 88 per cent revenue decline in its fixed income unit, to $262 million, in the first quarter as the division bore the brunt of the mortgage losses through declining valuations in its portfolio of homeloan backed securities.

Meanwhile, equities revenue rose by 6 per cent to $1.4 billion, merger advisory fees jumped by 34 per cent to $330 million and investment management revenue rose by 39 per cent to $968 million.

Mr Fulds said: “In what remains a challenging operating environment, our results reflect the value of our continued commitment to building a diversified platform and our focus on managing risk and maintaining a strong capital and liquidity position."

Relief that results were better than expected boosted the London market up by 145 points to 5559.4 and sterling strengthened.

There has been some speculation that the Fed cut by as much as a full percentage point to 2 per cent, which would be the biggest reduction since 1984, when Paul Volcker led the central bank.

The Fed has already cut its discount rate by a quarter of a percentage point to 3.25 per cent at an emergency meeting on Sunday, its first weekend meeting since 1979, after JP Morgan Chase's rescue of Bear Stearns.

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