The European Central Bank (ECB) today kept eurozone interest rates pegged at a seven-year high of 4.25 per cent for a third month in a row, despite the recent convulsions in world financial markets.

The hardline verdict from the Frankfurt-based ECB was widely expected by economists, in spite of the financial turmoil and mounting evidence that the eurozone economy is rapidly sliding into recession.

The ECB has stuck to its tough stance that it has to prioritise combating inflation as soaring food and fuel costs have inflamed price pressures across the 15-nation eurozone.

Commenting on the meeting between the ECB's governing council, Jean-Claude Trichet, president of the ECB, said: "We discussed extensively the recent intensification of the financial market turmoil and its possible impact on economic activity and inflation, recognising the extraordinarily high level of uncertainty stemming from latest developments.

"In this context, we stressed the crucial importance of keeping inflation expectations firmly anchored in line with our objective."

Latest figures this week showed eurozone inflation eased a little last month to an annual pace of 3.6 per cent, but remained far above the ECB's target of "close to, but below, 2 per cent".

But hopes are rising that the ECB will bow to pressure to cut rates before the end of the year as the threat of recession intensifies. Mr Trichet admitted today that the governing council discussed cutting interest rates before voting to hold.

This week also brought official figures showing that unemployment in the eurozone is rising sharply, while the bloc's manufacturing industry is in its weakest condition since September 2001, just after the terrorist attacks on the US that year.

European leaders are set to meet on Saturday to discuss France’s plan for a €300 billion (£236 billion) bailout fund to rescue struggling banks.

Gordon Brown will attend Saturday’s emergency summit hosted by Nicolas Sarkozy, the French President, whose country holds the European presidency.

Silvio Berlusconi, the Italian Prime Minister, and Angela Merkel, the German Chancellor, will also attend the meeting. But President Sarkozy's proposal was greeted with scepticism in Britain and outright hostility in Germany.

It appears to involve the creation of a Europe-wide emergency fund that would be used to prop up banks when national governments are unable to intervene.

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